RBI Monetary Policy April, 2024 announced today: RBI has announced its latest monetary policy decisions, maintaining the repo rate at 6.5% for the seventh consecutive time. Alongside, RBI projects a robust GDP growth rate of 7% for the fiscal year 2024-25, with quarterly growth rates varying between 6.9% and 7.1%. Additionally, the central bank anticipates retail inflation to remain stable at 4.5% for the fiscal year. Furthermore, the policy introduces measures aimed at fostering retail participation in government securities, enabling trading of Sovereign Green Bonds in the International Financial Services Centre (IFSC), and facilitating cash deposits in banks through the Unified Payments Interface (UPI). Notably, India’s forex reserves have surged to a record high of USD 645.6 billion.
RBI Monetary Policy At A Glance – April, 2024
Some of the highlights of RBI Monetary Policy 2024 is summarised in the points below.
- Repo rate maintained at 6.5% for the seventh consecutive time.
- GDP growth projected at 7% for the fiscal year 2024-25.
- Quarterly GDP growth rates forecasted at 7.1% for Q1, 6.9% for Q2, and 7.0% for both Q3 and Q4.
- Retail inflation expected to be 4.5% for the fiscal year.
- India’s forex reserves reached an all-time high of USD 645.6 billion as of March 29.
- Trading of Sovereign Green Bonds permitted in International Financial Services Centre (IFSC).
- Introduction of a mobile app to facilitate retail participation in government securities (G-secs).
- Authorization of cash deposits in banks through UPI.
Post Monetary Policy Press Conference by Shri Shaktikanta Das, RBI Governor- April 05, 2024 at 12 noon https://t.co/Drgdv0OmiA
— ReserveBankOfIndia (@RBI) April 5, 2024
Monetary Policy
Monetary policy is a document framed and issued by the central bank of a country, such as the Reserve Bank of India (RBI), outlining the actions it will take to manage the supply of money, interest rates, and credit conditions in the economy.
Objectives Of Monetary Policy
The primary goal of monetary policy is to achieve and maintain price stability, low inflation, and promote economic growth and stability.
Central banks use various tools, such as open market operations, reserve requirements, and discount rates, to implement monetary policy and achieve their objectives.
Instruments Of Monetary Policy
The Reserve Bank of India (RBI) employs various instruments to implement monetary policy and achieve its objectives. Some of the key instruments include:
Repo Rate
It is the rate at which the the Reserve Bank of India lends money to commercial banks for the short term, usually overnight. It is one of the main tools used by central banks to control monetary policy.
When the RBI wants to increase the money supply in the economy, it may lower the repo rate. This makes it cheaper for commercial banks to borrow money from the RBI, encouraging them to borrow more. The commercial banks can then lend this money to businesses and individuals, increasing the overall money supply in the economy and stimulating economic activity.
Conversely, when the RBI wants to reduce the money supply or control inflation, it may raise the repo rate. This makes it more expensive for commercial banks to borrow money, leading to a decrease in borrowing and lending activity, which in turn reduces the money supply and helps control inflation.
Thus, Repo Rate is a key tool used by RBI to regulate the money supply and control inflation in the economy.
Reverse Repo Rate
It is the rate at which the Reserve Bank of India borrows money from commercial banks against the collateral of government securities. It is a key monetary policy tool used to control the money supply and liquidity in the economy.
When the RBI increases the reverse repo rate, it incentivizes banks to park more funds with the central bank to earn higher returns, as they can earn a higher interest rate on these funds compared to lending to other banks or customers. This reduces the amount of money available for lending and investment in the economy, which can help control inflation.
On the other hand, when the RBI decreases the reverse repo rate, it encourages banks to lend more and invest in higher-yielding assets, thus increasing the money supply and stimulating economic activity.
Cash Reserve Ratio (CRR)
It refers to the percentage of a bank’s total deposits that it must keep as reserves with the RBI, in the form of cash or as deposits with the central bank. It is a tool used to regulate the liquidity in the banking system and control the money supply.
When the Cash Reserve Ratio (CRR) is increased, banks are required to keep a higher percentage of their deposits as reserves with the RBI. This reduces the amount of money available for lending and investment, as banks have less funds to extend credit to customers and invest in other assets. The reduction in lending capacity can lead to a decrease in the money supply in the economy, as there is less liquidity available for economic activities. Additionally, the increase in CRR can result in higher interest rates, as banks may raise their lending rates to compensate for the higher cost of maintaining reserves with the RBI.
Conversely, when the CRR is decreased, banks are required to keep a lower percentage of their deposits as reserves, which increases their lending capacity. This can stimulate economic activity, as there is more money available for lending and investment. The increase in liquidity can lead to lower interest rates, as banks may lower their lending rates to attract borrowers.
Statutory Liquidity Ratio (SLR)
It is a requirement set by the RBI, which mandates commercial banks to maintain a certain percentage of their deposits in the form of liquid assets, such as cash, gold, or government-approved securities. This ratio acts as a safety net for banks, ensuring they have sufficient liquid assets to meet depositor withdrawals and other financial obligations.
If the SLR is increased, banks are required to hold a higher proportion of their deposits as liquid assets, such as cash, gold, or government-approved securities. This reduces the amount of funds available for lending, as banks allocate more resources towards meeting the increased SLR requirement. As a result, there is less credit available in the economy, leading to a potential slowdown in economic activity and investment.
On the other hand, if the SLR is decreased, banks have more flexibility in deploying their funds for lending purposes. This can stimulate economic growth by increasing the availability of credit and promoting investment and consumption. However, a lower SLR also poses risks, as it may lead to excessive lending and liquidity in the financial system, potentially fueling inflation or asset bubbles. Therefore, changes in the SLR are carefully considered by RBI, taking into account various economic factors and monetary policy objectives, to ensure the stability and efficiency of the banking system while supporting sustainable economic growth.
Open Market Operations (OMO)
Buying and selling of government securities by the RBI to regulate liquidity in the banking system.
Open Market Operations (OMO) are a fundamental aspect of monetary policy employed by RBI to regulate the money supply and influence interest rates in the economy. These operations involve the buying and selling of government securities in the open market.
When RBI conducts open market purchases, it buys government securities from banks and financial institutions, injecting funds into the banking system. This increases liquidity in the market, leading to lower interest rates. With lower interest rates, borrowing becomes cheaper for businesses and individuals, stimulating investment and consumption, and thereby promoting economic activity and growth.
Conversely, if the RBI conducts open market sales, it sells government securities to banks and financial institutions, withdrawing funds from the banking system. This reduces liquidity in the market, leading to higher interest rates. Higher interest rates make borrowing more expensive, which can dampen investment and consumption, thereby curbing inflationary pressures and asset bubbles.
Marginal Standing Facility (MSF)
The Marginal Standing Facility (MSF) is a liquidity facility provided by the Reserve Bank of India (RBI) to scheduled commercial banks in India. It allows banks to borrow funds overnight from the RBI against their government securities, in case of emergency or temporary liquidity mismatches.
The MSF was introduced by the RBI to provide an additional liquidity window to banks in situations where they face unexpected liquidity shortages beyond their normal borrowing limits.
The interest rate charged on funds borrowed through the MSF is typically higher than the repo rate, which acts as a penalty rate to discourage banks from excessively relying on this facility.
Banks can access the MSF window to meet their urgent funding requirements, such as to manage their liquidity positions or to fulfill their reserve requirements. However, the use of the MSF is typically seen as a last resort measure, and banks are encouraged to maintain adequate liquidity buffers and manage their funds prudently.
Bank Rate
The bank rate is the rate at which a RBI lends money to commercial banks and financial institutions for a longer-term period. It serves as a benchmark for other interest rates in the economy and is a key tool used by RBI to influence monetary policy. The bank rate tends to have a more indirect impact on short-term interest rates and broader economic activity compared to the repo rate. Changes in the bank rate are less frequent and are often used as signals of the broader stance of monetary policy. It is also known as the discount rate or policy rate
When the bank rate increases, borrowing becomes more expensive for commercial banks, which in turn leads to higher interest rates on loans to consumers and businesses. This discourages borrowing and spending, thereby slowing down economic activity and growth. However, it helps to control inflation by reducing the amount of money available for spending, thus dampening demand and preventing prices from rising too rapidly.
Conversely, when the bank rate decreases, borrowing becomes cheaper, stimulating borrowing and spending, which boosts economic activity and growth. Lower interest rates encourage investment and consumption, but they can also lead to inflation if demand outpaces supply.
Monetary Policy Committee
The Monetary Policy Committee (MPC) is a committee established by the RBI, tasked with making key decisions related to monetary policy. Its primary responsibility is to set the benchmark interest rates, such as the repo rate and reverse repo rate, which influence borrowing costs and liquidity conditions in the economy.
The MPC is typically composed of both Reserve Bank of India officials and external members, such as economists and experts from various fields, who collectively analyze economic data and trends to formulate monetary policy decisions. The committee’s decisions are aimed at achieving the RBI’s objectives, such as price stability, economic growth, and financial stability, while considering factors like inflation, growth prospects, and global economic conditions.
It typically consists of six members. Out of these, three members are from the Reserve Bank of India (RBI), including the RBI Governor (who is the ex-officio Chairperson of the MPC), the Deputy Governor in charge of monetary policy, and one officer of the RBI. The other three members are appointed by the central government based on their expertise in economics, banking, finance, or related fields.
Frequency of RBI’s Monetary Policy Releases
The Reserve Bank of India (RBI) typically releases its monetary policy (RBI Monetary Policy) statement bi-monthly, which means six times a year. These announcements are scheduled as per the RBI’s monetary policy calendar, with the dates usually known in advance.
The monetary policy statements provide insights into the RBI’s decisions regarding key interest rates, policy measures, and its assessment of economic conditions and outlook.
Frequently Asked Questions – Monetary Policy
What is monetary policy?
Monetary policy refers to the actions undertaken by the central bank of a country, such as the Reserve Bank of India (RBI) in the case of India, to regulate the money supply, interest rates, and credit conditions in an economy.
What is the monetary policy of RBI?
The monetary policy of the Reserve Bank of India (RBI Monetary Policy) involves various measures aimed at controlling inflation, maintaining price stability, and promoting economic growth.
These measures include setting the repo rate (the rate at which the RBI lends to commercial banks), adjusting the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements for banks, conducting open market operations (OMO) to manage liquidity in the financial system, and employing other tools like the marginal standing facility (MSF) rate and the bank rate.
The RBI’s monetary policy is implemented by the Monetary Policy Committee (MPC), which meets regularly to assess economic conditions and decide on the appropriate stance of monetary policy for India.
What are the objectives of monetary policy?
The primary objective of monetary policy is to achieve and maintain price stability, low inflation, and promote economic growth and stability.
Central banks use various tools, such as adjusting interest rates, open market operations, reserve requirements, and other measures, to influence economic variables and achieve their objectives.
What are the instruments of monetary policy of RBI?
The instruments of monetary policy used by the RBI (RBI Monetary Policy) include the repo rate, reverse repo rate, cash reserve ratio (CRR), statutory liquidity ratio (SLR), open market operations (OMO), marginal standing facility (MSF), and bank rate.
How many times in a year does RBI release monetary policy?
The RBI releases its monetary policy (RBI Monetary Policy) statement six times a year, approximately once every two months, as part of its bi-monthly Monetary Policy Committee (MPC) meetings.
What is the full form of Repo Rate?
The full form of Repo Rate is “Repurchase Rate.”
What is Repo Rate?
The repo rate is the interest rate at which the reserve bank of India lends money to commercial banks, serving as a crucial tool for influencing borrowing costs and economic activity in an economy. A higher repo rate makes borrowing more expensive, which can help control inflation, while a lower repo rate encourages borrowing and spending to stimulate economic growth.
What is current Repo Rate?
The current repo rate is 6.50 per cent, as decided by the Monetary Policy Committee (MPC) on April 5, 2024, during its meeting.
What is Reverse Repo Rate?
The Reverse Repo Rate is the interest rate at which the Reserve Bank of India (RBI) borrows money from commercial banks within the country, typically on a short-term basis. It is one of the key tools used by the RBI to regulate liquidity and credit conditions in the economy.
What is current Reverse Repo Rate?
As of April 5, 2024, during its meeting, the RBI Monetary Policy Committee (MPC) decided to set the current reverse repo rate at 3.35 percent.
What is Cash Reserve Ratio?
The Cash Reserve Ratio (CRR) is a tool used by RBI to regulate liquidity in the banking system. It mandates banks to hold a percentage of their deposits as reserves with the RBI, influencing the money available for lending and investment. Adjusting the CRR helps central banks manage inflation and control the money supply in the economy.
What is current Cash Reserve Ratio?
As determined by the RBI Monetary Policy Committee (MPC) during its meeting on April 5, 2024, the current Cash Reserve Ratio (CRR) stands at 4.5%.
What is Statutory Liquidity Ratio?
The Statutory Liquidity Ratio (SLR) is a regulatory requirement that mandates commercial banks to maintain a certain proportion of their net demand and time liabilities (NDTL) in the form of liquid assets like cash, gold, or government-approved securities. This ratio is established by the Reserve Bank of India, as a prudent measure to ensure banks have enough liquidity to meet their financial obligations and protect depositors’ funds. An increase in SLR requires commercial banks to hold more liquid assets, reducing funds for lending and potentially slowing economic activity. Conversely, a decrease in SLR boosts lending capacity, stimulating growth but risking inflation or asset bubbles. RBI adjust the SLR cautiously to balance financial stability and economic growth.
What is current Statutory Liquidity Ratio?
As determined by the RBI Monetary Policy Committee (MPC) during its meeting on April 5, 2024, the current Statutory Liquidity Ratio (SLR) stands at 18.0%.
What is Open Market Operations?
In Open Market Operations (OMO), RBI buys and sells government securities in the open market to influence the money supply, interest rates, and liquidity in the banking system. When RBI buys government securities, it injects funds into the banking system, increasing liquidity and lowering interest rates. Conversely, when it sells government securities, it withdraws funds from the banking system, reducing liquidity and raising interest rates. OMOs are flexible and allow central banks to fine-tune monetary policy to achieve specific economic goals, such as controlling inflation or stimulating economic growth.
What is Marginal Standing Facility?
The Marginal Standing Facility (MSF) is a liquidity facility provided by the RBI to scheduled commercial banks, allowing them to borrow funds overnight against their government securities in times of emergency or temporary liquidity shortages. The MSF serves as a safety net for banks facing unexpected funding gaps, providing them with access to additional liquidity beyond their normal borrowing limits, albeit at a higher interest rate than the repo rate.
What is current Marginal Standing Facility rate?
As decided by the RBI Monetary Policy Committee (MPC) during its meeting on April 5, 2024, the current Marginal Standing Facility Rate is set at 6.75 percent.
What is Bank Rate?
The bank rate is the rate at which the RBI lends money to commercial banks for a longer-term period. When the bank rate increases, borrowing becomes costlier, slowing economic activity and curbing inflation. Conversely, when it decreases, borrowing becomes cheaper, stimulating economic growth but risking inflation if demand surpasses supply.
What is current Bank Rate?
According to the decision made by the RBI Monetary Policy Committee (MPC) during its meeting on April 5, 2024, the current Bank Rate is set at 6.75%.
What is Monetary Policy Committee?
The Monetary Policy Committee (MPC) is a committee responsible for setting key interest rates to influence borrowing costs and liquidity in the economy. It comprises central bank officials and external members who analyze economic data to formulate policy decisions aimed at achieving price stability, economic growth, and financial stability.
How many members are in the RBI Monetary Policy Committee?
The RBI Monetary Policy Committee (MPC) typically consists of six members, with three members appointed by the Reserve Bank of India and three external members appointed by the government. This composition ensures a balance of perspectives and expertise in analyzing economic data and formulating monetary policy decisions.
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