MONETARY POLICY

MONETARY POLICY

TOPIC: Economy 

Context-The Reserve Bank of India (RBI) is expected to start on a gradual normalisation of the reverse repo rate, hiking it by about 25 basis points in the upcoming Monetary Policy Review.

Concept-

Repo and Reverse Repo Rate:

• Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
• Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.
• Marginal Standing Facility (MSF): MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.

Monetary Policy Corridor

• The Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate.
• Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate.
• The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

Monetary Policy Committee

• The Monetary Policy Committee is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
• The Governor of RBI is ex-officio Chairman of the committee.
• The committee comprises six members (including the Chairman) – three officials of the RBI and three external members nominated by the Government of India.
• Decisions are taken by majority with the Governor having the casting vote in case of a tie.
• Function: The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).