RBI’s Monetary Policy: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has considerable influence over the economic climate of the nation. Each choice they make affects borrowing rates, liquidity, and the expansion of the economy as a whole. Let us take a journey to understand the complex web of financial concepts that the RBI uses to make these important choices as it reveals its most recent monetary policy position.
Table of Contents
- 1 1. Rate of Repo:
- 2 2. Rate of Reverse Repo:
- 3 3. Standing Deposit Facility Rate (SDF):
- 4 4. Marginal Standing Facility Rate (MSF):
- 5 5. Liquidity Adjustment Facility (LAF):
- 6 6. Interest Rate on Bank:
- 7 7. Ratio of Cash Reserves (CRR):
- 8 8. Statutory Liquidity Ratio (SLR)
- 9 9. Operations on the Open Market (OMOs):
1. Rate of Repo:
Rate at which the RBI extends credit to commercial banks is defined.
Impact: Affects both borrowing prices and economic expansion.
Understanding: A lower repo rate increases liquidity, whereas a raise slows growth but reduces inflation.
2. Rate of Reverse Repo:
Definition: The interest rate at which commercial banks lend money to the RBI.
Impact: Affects the lending and borrowing practices of banks.
Insight: Banks are encouraged to store cash with the RBI via higher reverse repo rates, which lowers liquidity.
3. Standing Deposit Facility Rate (SDF):
Definition: The RBI offers banks an overnight opportunity to deposit surplus money.
Goal: Assists in keeping short-term interest rates stable.
Persight: Offers a safe way to handle excess cash without requiring collateral.
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4. Marginal Standing Facility Rate (MSF):
Rate at which banks can take out overnight loans from the RBI on assets that have been authorized.
Significance: Assists banks in meeting sporadic liquidity requirements.
Insight: Borrowing from the RBI costs more when the MSF rate is higher.
5. Liquidity Adjustment Facility (LAF):
Definition: Repos and reverse repos are tools for addressing short-term liquidity needs.
Impact: Has an impact on important financial factors like interest rates.
Understanding: Promotes stable short-term interest rates and seamless money market functioning.
6. Interest Rate on Bank:
Rate at which the RBI extends credit to commercial banks is defined.
Has an impact on banks’ borrowing costs and lending rates.
Insight: Applied to restrain credit expansion and inflation.
7. Ratio of Cash Reserves (CRR):
The percentage of deposits that banks are required to keep with the RBI.
Controls the flow of money through the banking system.
Understanding: A higher CRR lowers lending funds available, which lowers inflationary pressures.
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8. Statutory Liquidity Ratio (SLR)
The bare minimum of liquid assets that banks are required to retain relative to deposits.
Function: Maintains banks’ stability and solvency.
Perception: Controls the expansion of credit and oversees liquidity within the banking sector.
9. Operations on the Open Market (OMOs):
Definition: The open market purchases and sales of government securities by the RBI.
Role: Controls interest rates and liquidity conditions.
Observation: Aids in preserving financial
