The RBI (Reserve Bank of India) has released its 6th Bi-monthly policy for FY 2019-2020. The Monetary Policy Committee (MPC) was led by RBI Governor Shaktikanta Das. The Monetary Policy Committee (MPC) meeting was held during 3rd, 4th and 5th February 2020 to assess current and evolving macroeconomic and financial conditions and the outlook. The MPC voted unanimously to keep the policy rate unchanged and continue with the accommodative stance.

Monetary policy refers to the policy of the central bank concerning the use of monetary instruments under its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

The MPC constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target, presently 4 % with a tolerance band of +/- 2 %. The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy and analytical work of the Reserve Bank contribute to the process for arriving at the decision on the policy repo rate. The Financial Market Committee (FMC) meets daily to review the liquidity conditions to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.

Monetary Policy Committee

1. Governor of the Reserve Bank of India – Chairperson, ex officio: Shaktikanta Das.
2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy: Dr. Michael Debabrata Patra.
3. Executive Director of the Reserve Bank of India: Dr. Janak Raj.
4. Dr. Chetan Ghate, Professor, Indian Statistical Institute (ISI)- Member.
5. Dr. Pami Dua, Director, Delhi School of Economics– Member.
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad– Member.

Instruments of Monetary Policy

Several direct and indirect instruments are used for implementing monetary policy. They are as follows:

• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
• Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
• Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
• Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

Monetary Policy announcements

• The RBI has decided to keep the policy repo rate under the LAF (Liquidity Adjustment Facility) unchanged at 5.15 %.
• Consequently, the reverse repo rate under the LAF remains unchanged at 4.90 %.
• The marginal standing facility (MSF) rate and the Bank Rate remains unchanged at 5.40 %.
• GDP growth for FY 2020-21 has been projected at 6% – in the range of 5.5-6% in H1 and 6.2% in Q3.
• Retail Inflation has increased from 4.6% in October to 5.5% in November. It increased further to 7.4% in December 2019. It is the highest since July 2014
• The Committee estimates CPI for Q4 of the Financial Year 2020 at 6.5%. For Q3, it was at 3.2%.
• To create an enabling environment for the micro, small and medium enterprises (MSME) sector in its efforts towards increased formalisation and to facilitate them to tide over this transition, the Reserve Bank has decided to extend the benefit of one-time restructuring without an asset classification downgrade to GST registered MSME accounts that were in default but standard as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.
• Clearing of cheques could soon be faster as the RBI has decided to extend the Cheque Truncation System (CTS) to all over India.
• To give a fillip to digital banking and to enable RRBs to provide cost-effective and user-friendly solutions to their customers, Regional Rural Banks (RRBs) are being allowed, like other commercial banks, to act as merchant acquiring banks using Aadhaar Pay – BHIM app and POS terminals.

The next meeting of the MPC is scheduled during March 31, April 1 and 3, 2020. Check out the highlights from Economic Survey 2019-20 and Union Budget 2020-21.