Monetary Policy: RBI Basics

Why did your Home Loan EMI suddenly increase? Why is your FD giving only 6% interest now (used to be 9%)?

Answer: The Reserve Bank of India (RBI) pulled a lever.

1. What is the RBI?

The Reserve Bank of India is India's Central Bank (Est. 1935).

Key Roles:

1. Monetary Policy (Control inflation and growth).
2. Currency Issuer (Print rupee notes).
3. Banker to Banks (Banks keep money with RBI).
4. Banking Regulator (Licenses banks, ensures they don't go bankrupt).

Current Governor: Shaktikanta Das (Since 2018).

2. What is Monetary Policy?

Monetary Policy = RBI's actions to control the money supply and interest rates to achieve:

1. Price Stability (Keep inflation at 4% ± 2%).
2. Economic Growth (Jobs, production).

The Balancing Act:

• High Interest Rates → Less borrowing → Less spending → Low Inflation but Slow Growth.
• Low Interest Rates → More borrowing → More spending → High Growth but High Inflation.

3. The Tools (How RBI Controls the Economy)

A. Repo Rate (The Master Switch)

Repo Rate = Interest rate at which RBI lends money to commercial banks.

• RBI increases Repo Rate → Banks borrow less → Banks increase lending rates → You get expensive loans → You spend less → Inflation drops.
• RBI decreases Repo Rate → Opposite.

Current Repo Rate (2024): ~6.5%.

Real-Life Impact:

• Repo Rate up → Your Home Loan EMI increases.
• Repo Rate down → Stock market rallies (Cheaper money for companies).

B. Reverse Repo Rate

Interest rate at which banks park money with RBI.

• Higher Reverse Repo → Banks park more → Less money in economy → Inflation falls.

C. CRR (Cash Reserve Ratio)

Percentage of deposits that banks must keep with RBI (Currently ~4.5%).

• RBI increases CRR → Banks have less money to lend → Credit crunch.

D. SLR (Statutory Liquidity Ratio)

Banks must invest a % of deposits in govt bonds (Currently ~18%).

E. Open Market Operations (OMO)

RBI buys or sells government bonds.

• Buys bonds → Pumps money into economy (Expansionary).
• Sells bonds → Sucks money out (Contractionary).

4. Inflation Targeting

Since 2016, RBI's only mandate is to keep inflation at 4% (± 2%).

Inflation > 6%? RBI increases Repo Rate (Even if it hurts growth). Inflation < 2%? RBI decreases Repo Rate (Boost growth).

Why 4%?

• Too low → Deflation (People delay purchases, economy stagnates).
• Too high → Erodes savings, hurts poor.

5. Recent History (2020-2024)

2020 (COVID):

• RBI slashed Repo Rate to 4% (Historic low).
• Pumped ₹10 Lakh Cr into economy.
• Goal: Prevent economic collapse.

2022-2023 (Post-COVID Inflation):

• Global inflation spiked (War in Ukraine, Supply chain issues).
• RBI increased Repo Rate to 6.5%.
• Goal: Control inflation (Crossed 7%).

2024:

• Inflation stabilized at 5%.
• RBI holding rates (Waiting and watching).

6. RBI vs US Fed (The Global Dance)

• US Fed increases rates → Dollar becomes attractive → Foreign investors pull money out of India → Rupee weakens → RBI forced to increase rates (To prevent capital flight).

Example:

• 2022: Fed increased rates aggressively.
• Rupee fell from ₹75/$ to ₹83/$.
• RBI had to match (Increase Repo Rate).

7-Day Action Plan

Day 1: Check the current Repo Rate on RBI's website.
Day 2: Track your bank's Home Loan / Car Loan interest rate. See the correlation with Repo Rate.
Day 3: Read RBI's latest Monetary Policy Statement (Released every 2 months). It's surprisingly readable!
Day 4: Understand Monetary Policy Committee (MPC) — 6 members vote on rate changes (Governor + 5 others).
Day 5: Learn about Liquidity Adjustment Facility (LAF) — How RBI injects/absorbs money daily.
Day 6: Check the current inflation rate (CPI). Is it within RBI's 4% ± 2% target?
Day 7: Follow RBI Governor on Twitter or read his speeches. They move markets!

Quiz

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💡 Final Wisdom: "The RBI is like the thermostat of the economy. Too hot (inflation)? Cool it down. Too cold (recession)? Heat it up."