RBI Monetary Policy 2024: Key Highlights and Framework in India

The Reserve Bank of India (RBI) serves as India's central bank, playing a crucial role in regulating the nation's money supply and determining interest rates. These functions directly influence inflation, growth rates, and economic stability. The Monetary Policy Committee (MPC), a six-member board, is responsible for setting interest rates to achieve economic goals. In 2024, the RBI focused on maintaining inflation control and promoting sustainable growth through its monetary policy measures.

What is meant by Reserve Bank of India (RBI)? 

• The Reserve Bank of India is India’s central bank. It is also the central bank of the country that regulates the money supply, and is also involved in the determination of interest rates which in a way determines inflation, growth rates and stability.

What is Monetary Policy Committee (MPC)?

• The MPC is an assembled board of six members responsible for determining the interest rates. They voted to leave interest rates unchanged and indeed there are political pressures that would want a rate cut.

Monetary Policy key points

• Interest Rates and Inflation Control:

  • This is pegged by the RBI with a view to encouraging or discouraging borrowing through the management of its costs by trying to contain inflation.

  • RBI has maintained the interest rate at 6.50 for 11 months to curb inflation and regulate the growth.

• Inflation and Growth:

  • Food prices have caused high inflation (rising prices) and overall growth has been lower than might have been expected.

  • Nevertheless, with regard to this process, the RBI still maintains inflation and tries to achieve sustainable growth.

• Inflation Targeting Framework:

  • This means inflation has to be contained within a predetermined inflation band, normally 4% with an additional one percent on either side. This allows the economy to remain constant since value going round the economy is constant.

Objectives of Monetary Policy

Monetary policy seeks to attain several the principal macroeconomic objectives:

• Boosting Economic Growth: Social and economic development should thus be accelerated in terms of investment.

• Price Stability: Inflation and price stability – topics which remain under significant debate today.

• Job Creation: Promote employment through economic growth.

• Exchange Rate Stability: Stabilise the value of currency for foreign exchange business.

Types of monetary policy

1. Expansionary Monetary Policy:

• Expansionary monetary policy is a strategy used by central banks to stimulate economic growth, especially during periods of slow growth or recession. 

• It involves lowering interest rates, making borrowing cheaper for consumers and businesses. 

• The central bank may also increase the money supply by buying government securities or reducing the cash reserve ratio, which gives banks more money to lend. 

• The aim is to encourage spending, investment, and job creation, thereby boosting economic activity and reducing unemployment. 

• This policy helps increase demand in the economy, promote growth, and avoid deflation.

2. Monetary Contractionary Policy:

• Contractionary monetary policy is used by central banks to slow down an overheating economy or control inflation. 

• It involves increasing interest rates, making borrowing more expensive for businesses and consumers, thereby reducing spending and investment. 

• The central bank may also sell government securities to reduce the money supply, or increase reserve requirements for banks, limiting their ability to lend. 

• This policy helps cool down excessive demand, control inflation, and stabilize the economy. 

• By making credit less accessible, contractionary policy aims to prevent the economy from growing too quickly, ensuring long-term price stability and financial health.

Monetary Policy in India

• Before 2016: There was only the RBI Governor who was held accountable for the formulation of monetary policy but with consultation with a Technical Committee.

• Post-2016: The Reserve Bank of India Act was amended to provide for the formation of the Monetary Policy Committee which is responsible for the decision of the monetary policy today.

Flexible Inflation Targeting Framework

• Objective: This is doable, but only if it is pursued alongside price stability and support for growth.

• Inflation Target: 4% for the year 2021 to 2025, +/- 2% of deviation allowed.

This framework has the effect of magnifying accountability and, of course, the transparency of the decision making within RBI.

Monetary Policy Committee

• The MPC comprises of six members:

• Governor, RBI (Chairperson)

• Additional Deputy Governor responsible for monetary policy

• RBI Official appointed by the Central Board of RBI

• Three external members, appointed by the central government, having expertise in economics, banking, finance, or monetary policy.

• These external members are selected for their integrity, expertise, and ability to provide informed input in decision-making.

Analyzing Monetary Policy Tools in India

Qualitative Tools

1. Marginal Requirements: Regulates loans offered by the banking institutions

2. Consumer Credit Regulations: Reduction of credit on the unnecessary consumption.

3. Moral Suasion: Guiding banks to respond to RBI directions with coordination and without force

4. Direct Action: Sanctions that can be put on banks that do not operate that way.

Quantitative Tools

1. Bank Rate: The interest rate at which the RBI provides funds to the commercial Banks.

2. Statutory Liquidity Ratio (SLR): This is the minimum proportion of an amount deposited with a bank that is required to be held in cash by the bank in the form of:

   • Cash, or

   • Gold, or

   • Securities referred to in Section 11(1) (a) (SLR Securities which include, Government securities like bonds or treasury bills and any other security as specified by RBI from time to time).

   • Any of the above three or a mixture of the three or even all the three in order.

   • Unlike the CRR, the SLR is not required to be deposited with the RBI and this was not a problem since the RBI used to buy government securities from the commercial banks.

   • If SLR is increased: When the RBI hikes the SLR, then the commercial banks are left with little money that can be used to finance customers. Consequently, the impact is less supply of money in circulation in the economy.

   • If SLR is decreased: If the RBI reduces the SLR, the money available with the commercial bank for lending to the customers will be higher. Thus, the impact results in an enhancement of the money supply in the economy.

3. Cash Reserve Ratio (CRR): This refers to the minimum percentage of bank deposits that must be held by the RBI.

   • If CRR is increased: In case the RBI raises the CRR, the commercial banks are left with limited cash to lend to customers after depositing more money with the RBI. As such, the outcome of the policy is less circulation of money in the economy.

   • If CRR is decreased: When RPM has reduced the CRR, the commercial banks need to deposit lesser money with the RBI, therefore they have more available money for lending to customers. Consequently, the money supply in the economy is raised.

4. Liquidity Adjustment Facility (LAF) helps the banks to borrow money from the RBI or lend to the RBI through ‘repo’ or ‘reverse repo’, respectively. It is designed to help banks manage the daily liquidity imbalances. It comprises the following 2 sub-instruments:

   • Repo Rate (Re-purchase Option Rate): Repo Rate is a short term borrowing operation subscribed by different commercial banks, wherein the RBI sells securities to those banks for a specific tenure in return of a specified rate of interest known as repo rate.

   • Reverse Repo Rate: It is the rate at which the RBI takes funds from commercial banks. In other words, it is the rate at which commercial banks place their surplus money with the RBI for a relatively short duration.

   • Open Market Operations (OMOs): Buying and selling government securities to regulate the availability of money supply in the economy.

Conclusion

Monetary Policy 2024 reflects the RBI's commitment to balancing inflation, growth, and financial stability. With tools like interest rate adjustments, inflation targeting, and innovative frameworks, the RBI continues to steer India's economy toward sustainable development. By addressing both short-term challenges and long-term objectives, the policy fosters a resilient and inclusive economic environment.