Explained: What is monetary policy
Here is all you need to know about the meaning of RBI's monetary policy review and the process behind its formulation
To achieve the goals of broad economic policy, the Reserve Bank of India (RBI) uses monetary policy to control inflation, interest rates, supply of money and credit availability.
The RBI has a government-constituted Monetary Policy Committee (MPC) which is tasked with framing monetary policy using tools like the repo rate, reverse repo rate, bank rate, cash reserve ratio (CRR). Among them, the repo rate, also known popularly as the policy rate, is the most powerful one. The repo rate is the interest rate at which the RBI provides loans to banks.
In the third bi-monthly monetary policy statement released today, the RBI increased the repo rate by 25 basis points to 6.5%. Any hike in the repo rate puts pressure on the marginal cost of funds based lending rate (MCLR) of banks. Since the interest rate of your loans are linked to the MCLR, a hike in the repo rate may indirectly lead to a hike in interest rates at the retail level as well.
How is the RBI’s monetary policy decided
The MPC is mandated to come out with a monetary policy. According to the RBI Act, the central government is empowered to appoint a six-member MPC. This is the list of all existing members of MPC.
1. The RBI governor is the ex officio chairperson of the MPC
2. The RBI deputy governor in charge of monetary policy is an ex officio member
3. The Central Board picks up one RBI officer as its member
4. Indian Statistical Institute (ISI) professor Chetan Ghate is a member
5. Delhi School of Economics director Professor Pami Dua is also a member
6. Indian Institute of Management (IIM), Ahmedabad, professor Ravindra H. Dholakia is a member
Besides the MPC itself, the RBI’s monetary policy department also contributes to the process. Views of key stakeholders are also accounted for while deciding the repo rate.
The MPC meets at least four times a year. All members are asked to vote on the policy decision. In the latest MPC meeting, Dholakia was the only one who voted against the decision. The minutes of the MPC’s meeting are also published later on by the RBI. The next meeting of the MPC is scheduled from October 3 to October 5 this year.
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