The Reserve Bank of India (RBI) is the apex monetary authority of the country responsible for managing the currency and macroeconomic stability of the economy. It regulates banking and other financial institutions, and reinforces fiscal and fiscal policies through monetary instruments. RBI is also responsible for issuing and managing the national currency, the Indian Rupee. The main aim of the RBI is to maintain price stability and to achieve and maintain a high level of economic growth. To achieve this aim, the RBI sets monetary policy which includes setting interest rates, controlling money supply and providing credit to the banking system.
The RBI’s monetary policy is focused on keeping inflation in check and fostering economic growth. To do this, the RBI monitors the macroeconomic environment, sets policies and outlines its measures to ensure inflation remains low and economic growth is maintained.
The current monetary policy of the RBI is focused on controlling inflation rate and boosting growth. To achieve this, the RBI has announced time to time reduction and addition in reverse repo rate, as well as a slash in the Cash Reserve Ratio (CRR). Additionally, the RBI has taken measures to provide liquidity to the banking system, by allowing banks to avail credit from the RBI.
To support the flow of credit and to reduce stress in the Non-Banking Financial Companies (NBFC) sector, the RBI has allowed direct access of liquidity to the NBFCs. Additionally, the RBI has allowed banks to use collaterals to gain access to credit at the repo rate.
The Monetary Policy of RBI is the framework it uses to influence the supply and availability of money and credit and thereby, promote economic stability. It specifies the actual steps taken by RBI to ensure macroeconomic and financial stability, including the rate at which it lends money to other banks. The Monetary Policy is one of the corner stone of RBI’s governance, and lays down its outlook for macroeconomic stability, inflation and economic growth.
The RBI implements a number of instruments to achieve the objectives laid out in its Monetary Policy. These instruments include reserve requirements, open market operations, Repo Rate and Reduced/Reverse Repo Rate, cash reserve ratio and statutory liquidity ratio. To control inflation, RBI uses a combination of high reserve requirements and tight open market operations. By raising the cash reserve ratio, it can directly control the amount of credit available in the country and by controlling the money supply, RBI can keep inflation in check.
On the other hand, if RBI wants to increase liquidity in the financial system, it can reduce reserve requirements, which would increase the amount of credit available in the country, making it easier for businesses to get credit and invest in new projects. Furthermore, it can reduce the repo rate, which is the rate of interest at which RBI lends money to the other banks. By reducing the repo rate, RBI encourages the banks to borrow money from it to make more credit available.
Apart from these instruments, RBI also uses open market operations to influence the money supply. Open market operations involve the buying and selling of government bonds in the open market by the RBI in order to control the terms of the money supply, such as the level of interest rates. In addition to the instruments mentioned above, RBI also implements other forms of measures like new regulations or guidelines for the banking and financial sector and occasionally, even government intervention.
The RBI’s monetary policy is an important tool for ensuring macroeconomic stability and facilitating economic growth in India. By taking necessary steps and utilizing the right instruments, RBI plays an instrumental role in controlling inflation, maintaining the money supply, and enabling economic growth. Overall, the current monetary policy of the RBI is aimed at keeping the inflation under control and boosting economic growth. The decision to reduce the repo rate and the CRR, increase liquidity and allow Direct Credit Substitution is expected to have positive effects on both inflation and growth.
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Disclaimer : “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “
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