RBI monetary policy & OBICUS

August 6, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

RBI monetary policy & OBICUS

Subject : Economy

Section: Monetary Policy

Context:

The MPC has raised the repo rate cumulatively by 140 bps in the May-August 2022 period from 4 per cent to 5.40 per cent to control inflation while striking a balance to enable growth in the economy.

Why the hike?

The RBI aims to bring inflation down to its targeted 4% (±2%) given the inflation being above the 6% tolerance limit for the six consecutive months.

How would it control inflation?

Repo rate refers to the rate at which the RBI lends to commercial banks.
When interest rates are raised, it makes money more expensive, thereby resulting in reduction of demand in the economy and bringing down inflation.

How will it impact borrowers and depositors?

While both borrowers and depositors are expected to see a hike in lending rates and offering on deposit rates, respectively.
Rise i n deposit rates would increase deposit to currency ratio and hence, reduce the money supply in the economy.
The loan rate would go up and hence the EMI for the same loan. This would severely hit individuals, especially fixed incomes groups.

What will be the impact of withdrawing the accommodative policy?

It can lead to hard landing or soft landing of the economy depending on the magnitude of following impacts:

The RBI’s market operations had led to a decline in liquidity i.e.money supply and inflation
It would increase deposit to currency ratio thus, increase availability of funds with banks that could lead to the “credit offtake” i.e. credit supply.
It would reduce consumer demand for goods and services and investment demand given the cost of borrowing .
It would further lead to capital inflows and appreciation of Indian rupee thus, leading to further:
- Decline in external debt to GDP ratio,
- Increase in net international investment position to GDP ratio, and
- Increase in debt service ratio
- Rise in foreign exchange reserves given the net forward assets.
- Reduction in Current account deficit.

OBICUS

The RBI has been conducting the OBICUS of the manufacturing sector on a quarterly basis since 2008.
It stands for – Order Books, Inventories and Capacity Utilization Survey (OBICUS).
The survey provides an insight into the demands of the Indian manufacturing sector.
The survey covers 2,500 companies both in the public and private sector.
The survey represents the movements in actual data on order books, inventory levels of raw materials and finished goods and capacity utilization.
- Inventory is the amount of goods held by a company.
- Capacity utilization refers to the manufacturing and production capabilities that are being utilized by a nation or enterprise.
The survey also gives out the ratio of total inventories to sales and ratio of raw material (RM) and finished goods (FG) inventories to sales in percentages.
It considered as important indicator to measure economic activity, inflationary pressures and the overall business cycle.
The survey provides valuable input for monetary policy formulation.
The Reserve Bank of India has launched the 58th round of its Order Books, Inventories and Capacity Utilisation Survey (OBICUS). The survey is for the reference period April – June 2022 (Q1:2022-23).