Amidst the growing impact of the Coronavirus, the Reserve Bank has announced a major cut in the repo rate, cash reserve ratio (CRR) reverse repo rate to increase cash flow in the economy and make debt cheaper.
- The central bank has cut the repo rate by 0.75 per cent after a three-day monetary policy committee meeting. The repo rate came down to 4.40 per cent after the cut. At the same time, the reverse repo rate has also been cut by 0.90 per cent to 4 per cent.
- The Reserve Bank has also reduced the cash reserve ratio (CRR) of banks by one per cent which has come down to three per cent. All these measures are expected to increase the economy by Rs 3.74 lakh crore in cash.
- Reserve Bank governor Shaktikanta Das said that the Reserve Bank is working in the mission. Whatever is necessary for the present situation, the Reserve Bank will take that step. He said that the Monetary Policy Committee meeting was scheduled to be held earlier in the first week of April but because of the prevailing circumstances, it has been made between 25th and 27th March.
Monetary Policy Committee
- Monetary Policy Committee is a Committee constituted by the Government of India constituted on 27th June 2016 to assess interest rates for commercial banks, inclusive growth in the economy and achieve the objectives set by the Government. The policy formulation in India has been entrusted to the newly constituted Monetary Policy Committee (MPC) by amending the Reserve Bank of India Act, 1934.
- The new MPC has a panel of six members consisting of three members from RBI and three other independent members elected by the Government of India. The three RBI officials include a governor, a deputy governor and an executive director.
- Monetary policy decides unanimously. If there is an equal vote, the governor has the right to vote decisively.
Some quantitative tools of monetary policy
- Repo rate – At this rate, RBI gives short-term loans to commercial banks and other banks. Lowering the repo rate means that the loans from the bank will become cheaper as banks will also reduce the loans provided to the people when they get cheaper loans from RBI. With the low repo rate, home loans, vehicle loans, etc., all become cheaper.
- Reverse repo rate – the rate at which banks get interested on money deposited with RBI on their behalf is called reverse repo rate. This is generally 50/07/2009 from the repo rate. 40 basic point is low. Reverse repo rates work to control liquidity in markets. Rbi increases the reverse repo rate when there is too much cash.
- CRR (Cash Reserve Ratio) – Under banking rules, all banks have to deposit a certain portion of their total cash with the Reserve Bank, which is called cash reserve ratio i.e. CRR.
- MSF (Standing Marginal Facility) – The Reserve Bank of India had introduced marginal permanent facility in its monetary policy (2011-12). Under MSF i.e. marginal standing facility, commercial banks can avail loans up to 1 per cent of their total deposits for one night.
- Slr (Statutory Liquidity Ratio) – SLR (statutory liquidity ratio) is the part of the deposits available with banks, which they are required to retain before issuing loans on their deposits. It can be cash, gold reserves, government securities etc. in any form.