Monetary Policy
Banking · मौद्रिक नीति
📋Quick Overview
Monetary policy is the process by which the RBI controls the money supply, interest rates, and credit availability in the economy. The primary objective is to maintain price stability while keeping in mind the objective of growth. The Monetary Policy Committee (MPC), constituted under Section 45ZB of the RBI Act, decides the policy rate. The inflation target is 4% (with ±2% tolerance band, i.e., 2%–6%). MPC has 6 members: 3 from RBI (including the Governor as chairperson) and 3 external members appointed by the Government.
⭐
MPC = 6 members (3 RBI + 3 Govt) | Inflation target = 4% (±2%) | RBI Governor = Chairperson of MPC with casting vote
📖Key Monetary Policy Tools
| Tool | What It Is | Effect When Increased |
|---|---|---|
| Repo Rate | Rate at which RBI lends short-term money to banks (against govt securities) | Banks borrow less → less money in economy → inflation decreases |
| Reverse Repo Rate | Rate at which RBI borrows money from banks (banks park excess funds) | Banks park more money with RBI → less lending → inflation decreases |
| CRR (Cash Reserve Ratio) | % of deposits banks MUST keep with RBI as cash (no interest earned) | Banks have less money to lend → money supply decreases |
| SLR (Statutory Liquidity Ratio) | % of deposits banks must keep as liquid assets (gold, govt securities, cash) | Less money available for lending → credit contracts |
| MSF (Marginal Standing Facility) | Emergency overnight borrowing by banks from RBI (at higher rate than repo) | Always 0.25% above repo rate. Banks dip into SLR quota |
| Bank Rate | Rate at which RBI lends long-term to banks (without collateral) | Higher borrowing cost for banks → less money in system |
| OMO (Open Market Operations) | RBI buys/sells govt securities in open market | Buying = injects liquidity; Selling = absorbs liquidity |
| LAF (Liquidity Adjustment Facility) | Framework under which repo and reverse repo operate | Daily window for banks to borrow/park funds with RBI |
📖CRR vs SLR
📝Monetary Policy Committee (MPC)
- •MPC constituted under Section 45ZB of RBI Act (amended 2016)
- •Total 6 members: 3 RBI (Governor + Deputy Governor + 1 RBI officer) + 3 external (appointed by Govt)
- •RBI Governor is the chairperson and has a casting vote in case of tie
- •MPC meets at least 4 times a year (now meets every 2 months = 6 times)
- •Inflation target: CPI 4% with tolerance band of ±2% (2%–6%)
- •Decision taken by majority vote
- •External members serve for 4-year term (not re-appointable)