RBI’s Monetary Policy Review Highlights

RBI’s Monetary Policy Review Highlights

Subject : Economy

Section: Monetary Policy

1. Policy Rate Unchanged:
   • The Reserve Bank of India (RBI) has maintained the policy rate at 6.5%, marking the fifth consecutive time without a change.
   • The decision is driven by the central bank’s vigilant stance on inflation.
2. Liquidity Management Tools Adjusted:
   • RBI has tweaked liquidity management tools, specifically the Marginal Standing Facility (MSF) and Standing Deposit Facility (SDF).
   • Reversal of MSF and SDF facilities will be allowed on weekends and holidays, effective from December 30, to enhance liquidity management.
   • The move aims to address the simultaneous high utilization of both MSF and SDF by banks.
3. Rate Details:
   • The Standing Deposit Facility rate remains at 6.25%.
   • The Marginal Standing Facility (MSF) rate is maintained at 6.75%.
4. Deficit Liquidity and Government Spending:
   • System liquidity, measured by the net position under the Liquidity Adjustment Facility (LAF), turned into a deficit in September 2023 for the first time since May 2019.
   • Deficit liquidity was influenced by factors such as higher currency leakage during the festive season, government cash balances, and RBI’s market operations.
   • RBI expects liquidity conditions to ease as government spending increases.
5. Additional Spending Proposal:
   • The Indian government has sought parliamentary approval for additional spending of Rs 1.29 trillion in the current fiscal year.
   • The proposed spending includes higher subsidies for farmers and funding for a rural job employment program.
   • Net additional spending for the fiscal year is Rs 58,378 billion rupees, with the remaining amount accommodated through expense reshuffling.
6. Future Outlook:
   • The RBI remains committed to nimble liquidity management, anticipating that government spending will further alleviate liquidity conditions.
7. Review Period for Adjusted Measures:
   • The newly introduced measure of allowing the reversal of liquidity facilities under SDF and MSF on weekends and holidays will be reviewed after six months or earlier if necessary.

Conclusion:

The RBI’s monetary policy review emphasizes maintaining the status quo on the policy rate, introducing measures for effective liquidity management, and addressing deficit liquidity concerns while anticipating the impact of increased government spending. The adjustments in liquidity tools aim to enhance flexibility and responsiveness in the banking system. The central bank remains watchful of inflation and committed to supporting economic stability.

Monetary Policy Instruments of RBI:

Qualitative Instruments:

1. Moral Suasion:
   • Persuasion and communication techniques to influence banks’ behavior.
   • Encourage or discourage certain activities without using direct regulatory measures.
2. Direct Credit Controls:
   • Regulation of credit flow to specific sectors or industries.
   • Target and control credit allocation to influence economic activities.
3. Selective Credit Controls:
   • Targeting specific types of loans to control demand in specific areas.
   • Direct control over credit for specific purposes, such as curbing inflation or promoting certain sectors.

Quantitative Instruments:

1. Cash Reserve Ratio (CRR):
   • Reserves that banks must maintain with the central bank against their total deposits.
   • Regulate the overall money supply in the economy.
2. Repo Rate:
   • The interest rate at which the central bank lends short-term funds to commercial banks.
   • Influence short-term interest rates and control liquidity in the banking system.
3. Reverse Repo Rate:
   • The interest rate at which banks can park excess funds with the central bank.
   • Control the money supply by managing the flow of funds in the banking system.
4. Bank Rate:
   • The rate at which the central bank provides long-term funds to commercial banks.
   • Regulate long-term interest rates and provide a benchmark for other interest rates.
5. Open Market Operations (OMOs):
   • Buying or selling government securities in the open market.
   • Influence money supply, interest rates, and liquidity conditions.
6. Liquidity Adjustment Facility (LAF):
   • Includes Repo Rate and Reverse Repo Rate.
   • Provide liquidity or absorb excess liquidity in the banking system.
7. Marginal Standing Facility (MSF):
   • Allows banks to borrow overnight funds against collateral.
   • Manage short-term liquidity needs of banks.
8. Statutory Liquidity Ratio (SLR):
   • Percentage of Net Demand and Time Liabilities (NDTL) to be maintained in approved securities.
   • Ensure banks hold a certain proportion of their deposits in liquid assets to meet obligations.