Monetary Policy – Banking Awareness

Monetary Policy-  is the policy adopted by the central bank (in India, the Reserve Bank of India – RBI) to control money supply and achieve macroeconomic objectives like inflation control, economic growth, and currency stability.

---

Objectives of Monetary Policy

• Control inflation and ensure price stability
• Promote economic growth and employment
• Maintain stability in the financial system
• Manage liquidity in the economy
• Stabilize exchange rates and ensure adequate credit flow

Types of Monetary Policy

• Expansionary Monetary Policy: Increases money supply to boost economic growth (used during slowdown or recession)
• Contractionary Monetary Policy: Decreases money supply to control inflation (used when inflation is high)

Tools of Monetary Policy

1. Quantitative Tools (General Tools)

• CRR (Cash Reserve Ratio): Percentage of total deposits banks must keep with the RBI in cash. High CRR = Less lending capacity
• SLR (Statutory Liquidity Ratio): Percentage of deposits banks must maintain in the form of gold/government securities
• Repo Rate: The rate at which RBI lends short-term funds to commercial banks. Lower Repo = Cheaper loans
• Reverse Repo Rate: The rate at which RBI borrows from banks. Used to absorb excess liquidity
• Bank Rate: Long-term lending rate from RBI without repurchase agreement
• MSF (Marginal Standing Facility): Emergency borrowing facility for banks above SLR limits

2. Qualitative Tools (Selective Tools)

• Credit Rationing: Limiting credit to certain sectors
• Margin Requirements: Setting limits on loan amount against security
• Moral Suasion: Informal persuasion by RBI to banks to follow certain policies

Monetary Policy Committee (MPC)

• Formed under the RBI Act, 1934 (amended in 2016)
• 6 members: 3 from RBI (including Governor), 3 appointed by Government of India
• Governor of RBI is the ex-officio Chairperson
• Decides the benchmark Repo Rate every two months

Inflation Targeting

• India follows a flexible inflation targeting framework
• Target: 4% CPI (Consumer Price Index) with ±2% tolerance (i.e., 2% to 6%)
• Set by the Government in consultation with RBI

Recent Monetary Policy Trends (2025)

• RBI has maintained a focus on inflation control amidst global uncertainties
• Repo Rate as of July 2025: 6.50% (subject to update)
• Liquidity adjustment to support economic recovery while containing inflation

---

Conclusion: Understanding Monetary Policy is crucial for banking exams, as it plays a vital role in managing the economy. Focus on tools, objectives, the MPC structure, and recent RBI decisions for your preparation.