Why is a Dollar ($) becoming stronger and a rupee becoming weaker day by day? Will a middle class person’s dream of travelling abroad come true some day? How much can RBI alone help in this? These are a few questions, which is cropping in every Indians mind these days….
Monetary policy in India is a process by which the Central Bank, i.e. RBI controls the supply of money by various measures to achieve economic growth.
What is RBIs monetary policy and how it impacts the banking sector?
Repo rate is the rate at which our banks borrow money from RBI. Currently, as per the monetary policy of 2013-14 and the amendments thereof, RBI has reduced the REPO rate by 25 basis points to 7.25 % and the reverse REPO rate, stands adjusted to 6.25 per cent with immediate effect. Now how does this affect a common man? When the central bank reduces the repo rate, the intermediate banks can take loans from the central bank at a lower rate of interest and consequently, the banks give various loans like the house loan, education loan etc. to a common man at lower interest rate and vice versa. The converse is also true.
The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.25 per cent with immediate effect. Thus the banks can now borrow overnight up to 2% of their Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. Thus common men can en cash any of his deposits overnight be it any amount.
The Bank Rate stands adjusted from 10.25 to 8.25 per cent with immediate effect.
The cash reserve ratio (CRR) of scheduled banks has been retained at 4.0 per cent of their net demand and time liabilities (NDTL).
What other sectors get impacted due to this?
In the short run, monetary policy influences inflation i.e. rise in prices and the economy-wide demand for goods and services and, therefore, the demand for the employees who produce those goods and services. Hence it influences the financial conditions of households and firms. Movements in the short-term interest rates influence borrowing costs for firms and households and the overall increase in long term interest rates as well–such as corporate bond rates and residential mortgage rates–because those rates reflect, among other factors, the current and expected future values of short-term rates. As a result of these factors, household wealth increases, this leads to even more spending.
Monetary policy can also influence overall inflation of a country. When the interest rate is reduced, the demand for goods and services increases and tends to push wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production. In addition, policy actions can influence expectations about how the economy will perform in the future, including expectations for prices and wages, and those expectations can themselves directly influence country’s inflation.
How does it affect an investor?
Now, the question remains…Although the government is taking massive steps, reforming policies day by day, then too, why is a common man struggling with his other needs when it comes to going abroad exploring new places, buying luxuries etc.??
This is majorly because the rupee is becoming weaker day by day, now an 18 year low to nearly 67 per USD. These are majorly due to inefficient monetary policies resulting in high current account deficit (CAD), insufficient FDI (foreign direct investments) in flows, FII outflows, overall economic contraction and strengthening of dollar overseas, which is contributing to the dump.
Therefore, looking at the volatile market and the current scenario an investor should take adequate measures before investing his hard core earned penny anywhere even in the banks. Keeping a track of the monetary policies an investor can directly know how he can mould it to his benefit. For e.g.- if someone is planning to take a home loan and finds out that government has reduced the Repo rate he can choose to take the loan now as he will also have to pay less interest on the amount borrowed.
To sum up, monetary policies can affect a common man’s business, family and the general living standard.
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What is RBI Monetary policy in India and how it affects the investor
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