NOTES 3 : Monetary Policy

What is Monetary Policy?

       Monetary Policy is the macroeconomic policy, refers to actions undertaken by the Central bank. In India Reserve Bank of India (RBI) is answerable for Monetary policy. Repo rate, Reverse Repo rate, CRR, SLR and so on are part of monetary policy.

Control money supply and interest rate and is the demand side economic policy used by the government to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

REPO Rate

• Repo Rate stands for Re Purchase Option. It refers to the rate at which RBI lends loans to Banks.

• Banks Re-Purchase the Securities deposited in the RBI at REPO rate.

• It is used to control the Inflation and the deficiency of Funds.

• The present repo rate is 4.00%.

Reverse Repo Rate

• The rate at which RBI at times borrows from the banks is known as Reverse repo rate.

• It is used to manage cash-flow.

• It is lower than the Repo rate.

• Present reverse repo rate is 3.35%.

Both these (Repo and Reverse repo rate) are the primary options of Liquidity Adjustment Facility (LAF).

Marginal Standing Facility (MSF)

• Marginal standing facility (MSF) is a rate at which banks can borrow money from Reserve bank of India overnight in emergency situation where inter-banks liquidity dries up completely.

• The borrowing limit of banks under the marginal standing facility (MSF) is 2% of their respective Net Demand and Time Liabilities (NDTL).

• This MSF scheme was launched by Reserve Bank of India (RBI) while reforming the Monetary policy in 2011-12.

• Present Marginal standing facility (MSF) is 4.25%.

Bank Rate 

• It is the rate charged by the Reserve Bank of India (RBI) for lending loans to commercial banks.

• It is 1% higher than the Repo rate.

• There is no limitation like 2% in MSF. It is completely different from MSF.

• Present Bank rate is 4.25%.