The Reserve Bank of India (RBI) has made some key changes to its monetary policy. The most notable of these is an increase in the policy repo rate. This rate is used by the central bank to regulate inflation and manage the money supply. This marks the first time the RBI has increased this rate since May 2020.
Understanding the Monetary Policy Committee
The Monetary Policy Committee (MPC) is a group that’s responsible for maintaining price stability and sustaining economic growth. This committee was recommended for establishment by an RBI-led team under Urjit Patel, the deputy governor at the time, in 2014. Today, the group is led by the Governor of RBI. The MPC determines the repo rate required to achieve the target for inflation of 4%.
Current Rates Set by the RBI
Several key rates were set by the RBI, including a policy repo rate of 4.40%, which is the rate at which RBI lends to banks during a funds shortfall. An SDF (Standing Deposit Facility) rate of 4.15% gives banks a place to park excess liquidity. Other rates include the Marginal Standing Facility rate (4.65%), bank rate (4.65%), CRR (Cash Reserve Ratio) of 4.50%, and an SLR (Statutory Liquidity Ratio) of 18.00%.
Why Increase the Repo Rate and CRR?
The decision to up the repo rate and CRR was taken in response to rising inflation caused by geopolitical tensions. With crude oil prices hovering above $100 a barrel, inflation has reached a multi-decade high in major global economies. The rate hikes are meant to control inflation and regulate the flow of money in the banking system.
Impact of Repo Rate and CRR Hikes
These changes will likely lead to higher interest rates in banks, affecting Equated Monthly Installments (EMIs) for various types of loans. This could negatively impact consumer demand. The CRR hike is projected to remove around Rs 87,000 crore from the banking system, reducing the lendable resources of banks.
What is Expansionary Monetary Policy?
Expansionist or expansionary monetary policy involves using central bank tools to stimulate the economy. This can involve increasing the money supply and lowering interest rates to boost economic growth. However, some actions, such as increasing the Marginal Standing Facility Rate or cutting the Statutory Liquidity Ratio, might not align with this type of policy. Using these measures can reduce the available resources for lending and reduce the flow of cash in the economy.