RBI Monetary Policy

Last Updated 22nd Sep 2020

RBI Monetary Policy Today

6th August 2020 – RBI keeps Repo Rate unchanged at 4%

RBI Monetary Policy Highlights new

The key indicators of RBI Monetary Policy along with their current rates in the table given below:

Indicator Current Rate
CRR 3%
SLR 18.50%
Repo Rate 4.00%
Reverse Repo Rate 3.35%
Marginal Standing Facility Rate 4.65%
Bank Rate 4.65%

What is RBI Monetary Policy 2020?

It is the policy formulated by the Reserve Bank of India in 2020 related to money matters of the country. The policy also takes into account the distribution of credit among users as well as the rate of interest on borrowing and lending. Since India is a developing country, the monetary policy is significant in the promotion of economic growth. The monetary policy in India is formulated by the Reserve Bank of India and relates to the monetary matters of the country. The policy involves measures taken to control inflation, regulate supply of money and cost of credit in the economy. The various instruments of monetary policy include variation in bank rates, other interest rates, supply of currency, etc.

On 22nd May 2020, RBI has cut the Repo Rate by 40 bps to 4.00% from 4.40% earlier and reverse repo rate by 40 bps to 3.35%. Cash Reverse Ratio (CRR) stands at 3%. RBI, on 17th April 2020, has cut the Reverse Repo Rate by 25 bps to 3.75%. This has been done to mitigate the impact of Covid-19. RBI has also announced that the banks, NBFCs and housing finance companies are permitted to allow their customers a 3 month moratorium in repayment of EMIs. This means that the borrower may not pay any EMI for 3 months subject to bank’s approval. This delay in EMIs will not have any negative impact on credit score. On 6th August 2020, RBI has kept the Repo Rate unchanged to 4.00% and reverse repo rate to 3.35%. Cash Reverse Ratio (CRR) stands at 3%. This has been done to limit the damage to the economy caused by the Covid-19 and subsequent lockdowns.

RBI Monetary Policy Highlights

Key highlights of RBI monetary policy as announced on August 6, 2020 are:

  • Repo rate remains unchanged at 4%.
  • Reverse repo rate also remains unchanged at 3.35%.
  • LTV ratio for gold loans increased to 90% from 75%.
  • There is no extension in EMI moratorium.
  • Lenders are allowed to restructure loans of corporate and individual borrowers.
  • Stressed MSME borrowers with standard loan accounts are eligible for the restructuring of debts.
  • RBI to allot ₹ 5,000 crores to housing finance companies, NHB and ₹ 5,000 crores to NABARD.
  • Startups to be considered as part of the priority sector.
  • Positive pay mechanism applicable on payment of all cheques up to and above ₹ 50,000.

Objectives of Recent Monetary Policy of RBI

The main objectives of the recent monetary policy of RBI are as follows:

  • Controlling imports and exports: Monetary policy helps industries to get a loan at a reduced interest rate, which means they can substitute imports by export-oriented units and, in turn, increase exports.
  • Promotion of savings and investments: A monetary policy can impact the savings and investment of the people. A higher rate of interest will result in greater investments and savings, thereby maintaining a healthy cash flow within the economy.
  • Managing business cycles: There are two main stages of a business cycle – boom and depression. The monetary policy is one of the most efficient financial tools that can help to control the boom and depression period of business cycles by managing credit distribution and supply of money in the economy.
  • Employment generation: A monetary policy can lead to reduced interest rates, which means small and medium enterprises (SMEs) can easily secure a loan for business expansion. This means more employment generation.
  • Development of infrastructure: The monetary policy by RBI allows concessional funding for the development of infrastructure within the country.
  • Developing and managing the banking sector: The central bank is responsible for managing the entire banking industry. RBI also instructs other banks using the monetary policy to establish rural branches for agricultural development wherever required. Additionally, the government has also set up cooperative and regional rural banks to help farmers receive the financial aid they require in no time.

Monetary Policy Tools

To control inflation, the Reserve Bank of India needs to increase the cost of fund or reduce the supply of money with the help of tools which are divided mainly into two categories – Quantitative and Qualitative tools.

Quantitative tools – These tools impact the money supply in the economy, including sectors such as manufacturing, housing, etc.

  • Reverse Ratio: Banks keep aside a certain percentage of cash reserves or RBI approved assets. There are two types of reserve ratio:
    • Cash Reserve Ratio (CRR): Banks set aside this portion in cash with the RBI. The bank cannot lend this amount to anyone or earn a profit or interest rate on CRR.
    • Statutory Liquidity Ratio (SLR): This portion is set aside by the banks in the form of liquid assets such as gold or RBI approved securities such as government securities. Banks earn interest on these securities, but it’s very low.
  • Open Market Operations: The RBI buys and sells government securities in the open market, also referred to as Open Market Operations to control the supply of money.

When the RBI sells government securities, the liquidity is sucked from the market, and buying securities provides liquidity, which helps to control inflation. The main aim of the open market operation is to keep a check on temporary liquidity mismatches in the market, which happens due to the inflow of foreign capital.

Qualitative tools - These tools affect the money supply of a specific sector of the economy.

  • Margin requirements: The RBI mentions a certain margin against collateral. When the RBI raises the margin requirements, customers will be able to borrow less and vice-versa.
  • Selective credit control: Through this method, RBI avoids lending to speculative businesses or selective industries.
  • Moral suasion: With the help of this tool, the central bank persuades other banks to keep money in government securities and not in any other sectors.

Market Stabilisation Scheme (MSS)

Market Stabilisation scheme or the MSS is the instrument used by the Reserve Bank of India(RBI) in times of excess liquidity. The scheme was brought into operation in the year 2004 to control the surge of US dollars in the Indian market. The RBI uses this technique to repair the excess liquidity prevailing in the market due to the issuance of securities on Government’s behalf like Treasury bills or Dated securities. The fund that the RBI raises under the MSS scheme is kept in a separate account from the Government account and is not used by the RBI to fund the regular expenditures. This separate account is called the MSS account. To manage the excess liquidity, the RBI issues securities under the MSS, which are called the MSS Bonds or the Market Stabilisation Bonds(MSBs). The various financial institutions further purchase these bonds in the country, and the funds earned by the selling of these bonds is Reserve Bank of India.

Monetary Policy Transmission

Monetary policy transmission is the course of action, wherein the monetary policy decisions taken by the RBI such as the change in the repo rate, are implemented throughout the financial market, and especially in the banking sector. The monetary policy transmission impacts the economic conditions and activities like consumption of funds and the investments portfolio. One of the most common examples of monetary policy transmission is the impact of the repo rate on the banking sector. While RBI has mandated the banks to link their loan products with the external benchmark, a number of banks like SBI, PNB, etc. have linked their retail loan products such as home loans, LAP, etc. to the repo rate. The repo linked lending rate impacts the loan rates and makes loans affordable for the general public since a decrease in repo rate reduces the loan rates. Thus, monetary policy transmission brings in transparency and affordability.

FAQs

What is the time of the RBI Monetary Policy?

The Reserve Bank of India reviews the monetary policy every two months. On August 06, 2020, the central bank released its bi-monthly monetary policy statement for the year 2020-21.

What is the current monetary policy?

As per the current monetary policy, the repo rate stands at 4.00% and the reverse repo rate at 3.35%. The marginal standing facility (MSF) rate and the Bank Rate stand at 4.65%.

What are the current rates of RBI?

The current rates as per RBI Monetary Policy are: SLR is 21.50%, Repo rate is 4.00%, Reverse Repo rate is 3.35%, MSF rate is 4.65%, CRR is 3% and Bank rate is 4.65%.

What is CRR and SLR?

Cash reserve ratio, as stipulated by RBI, is the minimum ratio of total deposits received by the bank that has to be kept in the form of cash.
At the end of each business day, every bank is required to maintain a portion of their Net Demand and Time Liabilities in the form of liquid assets like cash or gold. The ratio between these maintained liquid assets and liabilities is called Statutory Liquidity Ratio.

Can I take a loan from the RBI?

RBI is the regulating authority of all Banks. Just like people borrow funds from Banks, similarly, Banks borrow funds from the Reserve Bank of India. The interest rate at which the banks borrow funds from RBI is called the repo rate. The Reserve Bank of India made it compulsory for banks to lend loans at the repo linked lending rate by setting it as an external benchmark. Banks now offer repo rate linked home loan interest rates.

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