Policy Reforms by RBI to support Economy

Policy Reforms by RBI to support Economy

The article provides a brief idea about various rate cuts announced by RBI on 27th March 2020 after the Monetary Policy Committee meeting.

Monetary Policy Committee:

  • The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
  • The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India. They need to observe a "silent period" seven days before and after the rate decision for "utmost confidentiality".
  • The Governor of Reserve Bank of India is the chairperson ex officio of the committee.
  • Decisions are taken by majority with the Governor having the casting vote in case of a tie.
  • The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%.
  • The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC which will bring more transparency and accountability in fixing India's Monetary Policy.
  • The monetary policy is published after every meeting with each member explaining his opinions.
  • The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.

Members of Monetary Policy:

The composition of the current monetary policy committee is as follows:

 Sr. No.  Name  Designation
 1 Shaktikanta Das, Governor of the Reserve Bank of India   Chairperson ex officio
 2 Michael Debrata Patra, Deputy Governor of the RBI   In charge of monetary policy
 3  Dr. Janak Raj, Executive director of the RBI  In charge of monetary policy
4 Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) Member
5 Professor Pami Dua, Director, Delhi School of Economics Member
6 Dr. Ravindra H. Dholakia, Former Professor, IIM, Ahmedabad


Monetary Policy Committee Meeting:

  • Monetary Policy Committee held its meeting from 24th to 27th March, 2020.
  • It was first time the MPC met outside its bi-monthly meeting calendar.
  • As per RBI Act in case of administrative exigencies, the Governor may reschedule an MPC meeting or may hold an additional meeting if required.
  • Originally the meeting was scheduled in the first week of April but was preponed considering urgency of policy reforms in the country.

Changes in Monetary Policy Rates:

Repo Rate:

  • Massive reduction in Repo Rate under the Liquidity Adjustment Facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent with immediate effect.

Repo Rate Trends:

Month Repo Rate Reduction
April, 2019 6% 25 basis point
June, 2019 5.75% 25 basis point
August, 2019 5.40% 35 basis point
October 2019 5.15% 25 basis point
December 2019 5.15% 0 basis point
February 2020 5.15% 0 basis point
27th March, 2020 4.40% 75 basis point*

*Voted 4:2 by MPC.

Reverse Repo Rate:

  • Reverse repo rate under the LAF stands reduced by 90 basis points to 4.0 per cent.
  • According to RBI Governor reverse repo rate cut would incentivize banks to lend more; hence, more liquidity into the economy.

Reverse Repo Rate Trends:

 Month Rate  Reduction
 April, 2019 5.75% 25 basis point 
June, 2019  5.50% 25 basis point
 August, 2019 5.15% 35 basis point 
October, 2019 4.90% 25 basis point
December, 2019 4.90% 0 basis point
February, 2019 4.90% o basis point
27th March, 2020 4.00% 90 basis point

Cash Reserve Ratio:

  • The RBI has also cut the cash reserve ratio or CRR by 100 basis points to 3 per cent with effect from March 28.

CRR Trends:

Month Rate Reduction
April, 2019 4% 0 basis point
June, 2019 4% 0 basis point
August, 2019 4% 0 basis point
October, 2019 4% 0 basis point
December, 2019 4% 0 basis point
February, 2020 4% 0 basis point
27th, March, 2020 3% 100 basis point

Marginal Standing Facility Rate:

  • When banks face acute financial shortage, they can avail this special facility offered by RBI. In MSF, banks can borrow cash from RBI against their approved government securities.
  • MSF Rate is higher than Repo rate due to the fact that funds are released under this facility immediately.
  • In the recent policy meeting, MSF rate has been reduced to 4.65% from 5.40%.

Bank Rate:

  • Bank Rate is the rate of interest charged by the RBI against loans offered to commercial banks.
  • Bank rate is usually higher than repo rate. Unlike repo rate, bank rate directly affects the end user, in this case the customer, as high bank rates mean high lending rates.
  • When banks pay high interest rate to obtain loan from RBI, they in return charge the customer high interest rate to break even.
  • Also known as “Discount Rate”, bank rate is a powerful tool used by the RBI to control liquidity and money supply in the market.
  • In the recent policy meeting, bank rate has been reduced to 4.65% from 5.40%.

Long Term Repo Operations (LTRO):

  • RBI will conduct Long Term Repo Operations of up to 3-years tenor of up to Rs. 1 lakh crore at a floating rate linked to the policy repo rate.

Moratorium on Loans:

  • RBI permits all lending institutions to allow 3-months moratorium on payment of installments on term loans outstanding as on 1st March 2020.
  • The final decision to provide such a relief is in the hands of the banks.

Economic Growth Projections:

  • RBI decided not to make any projections about economic growth and inflation due to uncertainty pertaining to spread and duration of pandemic corona virus.
  • However, it is very clear that GDP Growth projections of 5% are far from achievable.

Overall Liquidity Infusion:

  • The measures in the form of favorable policy decisions will result into a total liquidity infusion of Rs. 3.74 lakh crore in to the economy.

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Financial Management