TEST SERIES 
Date : 10 Dec 2021
Reserve Bank of India (RBI) - Monetary Policy and Monetary Policy Committee (MPC)
Tags :Monetary Policy Committee (MPC); Why in News?
Monetary Policy Committee (MPC) kept the repo rate unchanged at 4 percent, reverse repo rate at 3.35 percent, and the marginal standing facility (MSF) rate and bank rate at 4.25 percent in the bi-monthly monetary policy review.
What is the Monetary Policy and Monetary Policy Committee (MPC)?
- Monetary policy refers to the policy of the central bank about the use of monetary instruments under its control to achieve the goals specified in the Act.
- The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy.
- This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
- Monetary Policy Committee (MPC) is a 6 member committee formed after the amendment in the RBI Act, 1934 through the Finance Act, 2016.
- The basic objective of MPC is to maintain price stability and accelerate the growth rate of the economy.
- Members:
- The committee comprises six members (including the Chairman) - three officials of the RBI and three external members nominated by the Government of India.
- Governor of the Reserve Bank of India – Chairperson, ex officio; (Shri Shaktikanta Das)
The instruments of monetary policy are of two types:
1. Quantitative Instruments: General or indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal standing facility and Liquidity Adjustment Facility (LAF))
- CRR refers to a certain percentage of commercial banks’ net demand and time liability that commercial banks have to maintain with the RBI at all times. In India, the CRR remains between 3-15 percent by the law.
- SLR refers to a certain percentage of reserves to be maintained in the form of gold and foreign securities. In India, SLR remains 25-40% by the law.
- The bank rate is the minimum rate at which the central bank lends money and rediscounts first-class bills of exchange and securities held by commercial banks.
- The sale and purchase of security in the long run/short run by the RBI in the money market are known as open market operations.
- A Repo rate is a rate at which commercial banks borrow money by selling their securities to the RBI to maintain liquidity.
- The rate at which RBI borrows money from commercial banks when there is excess liquidity in the market is called Reverse Repo rate. In that case, commercial banks get benefits by receiving the interest on their holdings with the RBI.
- MSF Rate is the penal rate at which the Central Bank lends money to banks, over the rate available under the rep policy.
- Credit Rationing: Under this method, RBI fixes a specific quota of credit that can be allocated for various sectors in the economy. Banks are told to adhere to these limits.
- Direct Action: If banks still fail to follow RBI’s guidelines, then they can impose a penalty or sanctions on it. This is called direct action.
- Moral suasion: Under this, the central bank advises banks to follow certain guidelines via issuing letters, seminars, circulars, etc. Banks are not legally obligated to follow such advice.
