The Monetary Policy Committee has decided to hike the repo rate by another 50 basis points to 5.9% from a rate of 4.4% earlier this May.
What is monetary policy?
Monetary policy is a plan under which the central bank takes necessary measures to ensure the economic growth and stability of the country.
These measures help the RBI to influence the demand and supply of money to stabilise inflation for the time being.
Tools of Monetary Policy- RBI uses several economic tools to control the economic activities, like
Changes in repo rates
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Engaging in open market operations of selling or buying government securities
Types of monetary policy
Contractionary policy- It increases interest rates and limits the money supply to slow growth and decrease inflation.
Expansionary policy- It happens during times of slowdown or a recession
It lowers the interest rates, where saving becomes less attractive and consumer spending and borrowing increase.
What are the goals of the monetary policy?
Inflation- Contractionary monetary policy is used to target a high level of inflation and reduce money circulating in the economy.
Unemployment- Higher money supply and attractive interest rates stimulate business activities and expands the job market.
Exchange Rates- With an increase in the money supply, the domestic currency becomes cheaper than its foreign exchange.
What are the key highlights of RBI Monetary Policy?
Status of Indian economy- The world is in midst of third major shock arising from aggressive rate hikes in advanced economies apart from the Covid impact and the Ukraine war.
Repo rate- RBI hikes benchmark lending rate by 50 basis points to 5.90%.
Others- Accordingly, the standing deposit facility (SDF) now stands at 5.65% and marginal standing facility (MSF) and bank rate at 6.15%.
Nature of policy- RBI to remain focused on withdrawal of accommodative monetary policy.
Inflation- Inflation expected to remain elevated at around 6% in second half of FY23.
Inflation projection for FY23 retained at 6.7% for FY23.
Currency- The rupee orderly depreciated by 7.4% against US dollar this year.
Forex Reserve- Forex Reserve now stands at 537.5 billion dollars.
Debt- External debt to GDP is lowest amongst growing economies.
Economic growth- RBI cuts its economic growth projection for FY23 to 7% from earlier estimate of 7.2%.
India’s import growth is decelerating compared to export growth.
What can be inferred from the report?
Rate hike- The move to hike the repo rate is justified under the extremely stressed global and domestic circumstances.
The unpredictable rupee was certainly an important factor.
Decline in forex reserves- 67% of the decline in the foreign exchange reserves since April was due to valuation changes arising from strengthening US dollar and higher American bond yields.
Growth forecast- Aggressive tightening of monetary policies globally has led to the cut in growth forecast to 7%.
Economic activity- The Indian economy continues to be resilient and the economic activity in India remains stable.
Strengthening the banking sector- The RBI has taken a few regulatory and developmental measures that will strengthen the balance sheets of the banking sector.
Similar to the NBFCs, banks will now be subjected to a strong way of “expected loss based approach” for their loan loss provisioning.
Securitization of stressed assets- The RBI is considering the introduction of a framework for the securitisation of stressed assets similar to that of standard assets.
This will widen the investor base for direct purchases of stressed loans from banks and could lead to better price discovery for banks.
Repo rate- Repo rate is the interest charged by the RBI when commercial banks borrow from them by selling their securities to the central bank.
Reverse repo rate- It is a rate at which RBI borrows money from the commercial banks of the country.
Inflation- Inflation is the economic situation when prices are rising over time and money loses value.
Currency depreciation- Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies.
Cash Reserve Ratio- It is a percentage of the banks' deposits maintained in cash form with the RBI.
Statutory Liquidity Ratio- It is an obligatory reserve of commercial banks' net demand and time liabilities, maintained as approved securities by the commercial banks themselves.
