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Notes on Monetary Policy

Notes on Monetary Policy

Today's notes is about Monetary Policy recently RBI has kept the rates unchanged in Monetary policy. The details and importance of monetary policy is discussed below. This topic is a part of banking awareness in general awareness.

What is Monetary Policy?
Monetary policy is the macroeconomic policy laid down by the central bank of the country, by RBI in India. It involves management of money supply and interest rate and it is used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
The tools which can be used by RBI are open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments. Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy. 

3rd Bi-monthly Monetary Policy
RBI kept its policy rates unchanged in its review on 4th Aug 2015. This means that it kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent. The central bank also kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability.

Major Highlights
a) Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent.
b) Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions.
c) SLR remained at 21.5%.
d) It  retains growth target at 7.6 per cent for 2015-16.

The reason for keeping the policy rate unchanged is Headline consumer price index (CPI) inflation which rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations. Also, food inflation rose 60 basis points over the preceding month, driven by a spike in prices of vegetables, protein items - especially pulses, meat and milk - and spices.” Even, prices on the whole have been going up as well. All this led to the RBI keeping the repo rate constant.

 Current Rates as on 6th Aug 2015:-
1) Policy Repo Rate:  7.25%
2) Reverse Repo Rate: 6.25%
3) Marginal Standing Facility Rate: 8.25%
4) Bank Rate: 8.25%
5) CRR: 4%
6) SLR: 21.5%
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