Context:
RBI’s Monetary Policy Committee (MPC) unanimously decided to keep repo rates unchanged at 6.5%.
Present Rates:
- Policy Repo Rate: 6.5%
- Rate at which the central bank of a country (RBI) lends money to commercial banks in the event of any shortfall of funds.
- Here, the central bank purchases the security.
- Reverse Repo Rate: 3.35%
- The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks.
- It is a tool used in monetary policy to manage and control the money supply in the economy.
- Standing Deposit Facility (SDF): 6.25%
- The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it.
- It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.
- Marginal Standing Facility Rate: 6.75%
- MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
- Bank Rate: 6.75%
- It is the rate charged by the RBI for lending funds to commercial banks.
- CRR: 4.50%
- Under CRR, the commercial banks have to hold a certain minimum amount of deposit (NDTL) as reserves with the central bank.
- SLR: 18.00%
- Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
Policy Stance:
- Accommodative stance –
- An accommodative stance in monetary policy indicates that the RBI is inclined to expand the money supply to stimulate economic growth.
- This is often achieved by lowering interest rates to encourage borrowing and spending.
- During an accommodative policy period, the RBI is willing to cut interest rates to make borrowing more attractive, intending to spur investment, consumption, and overall economic activity.
- Neutral stance –
- A neutral stance in monetary policy indicates that the RBI is open to either cutting or increasing interest rates.
- This approach is typically adopted when the policy priority is balanced between managing inflation and promoting economic growth.
- Hawkish stance –
- A hawkish stance in monetary policy signals that the RBI’s primary objective is to maintain low inflation.
- During a hawkish phase, the central bank is inclined to raise interest rates to cut the money supply and, consequently, lower demand in the economy.
- Calibrated Tightening –
- Calibrated tightening refers to a monetary policy stance where, within the current rate cycle, a cut in the repo rate is ruled out.
- Instead, the central bank is inclined to raise interest rates in a measured and deliberate manner.
Source: The Hindu
Must Read: Retail Inflation
Previous Year Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2020 Prelims]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)
Explanation:
Expansionary monetary policy, or easy monetary policy, is when a central bank uses its tools to stimulate the economy. It increases the money supply, lowers interest rates and increases demand. It boosts economic growth.
Raising SLR makes banks park more money in government securities and reduce the level of cash in the economy. Doing the opposite helps maintain cash flow in the economy. Hence, statement 1 is not correct.
With the increase of MSF Rate, cost of borrowing increases for banks resulting in reduced available resources to lend. Hence, statement 2 is correct.
Under expansionary monetary policy, RBI reduces repo rate and bank rate to increase liquidity in the banking sector. Hence, statement 3 is not correct.
