scorecardresearchWhat is RBI monetary policy and how does it affect your financial decisions?

What is RBI monetary policy and how does it affect your financial decisions?

Updated: 30 Sep 2022, 08:24 AM IST
TL;DR.
RBI monetary policy measures are not only making investment decisions, but it affects the overall financial decision of an individual. In this article, we are going to understand how and why RBI monetary policies and different tools affect us in making financial decisions.
Monetary policy is a plan under which the central bank of India, RBI, takes necessary measures to ensure the economic growth and stability of the country.

Monetary policy is a plan under which the central bank of India, RBI, takes necessary measures to ensure the economic growth and stability of the country.

Global economies are dynamically falling since coronavirus effects and geopolitical tensions, due to which central banks are constantly taking measures to control its impacts. So does the RBI. RBI, the central bank of India, is frequently taking controlling measures to curb the inflation and liquidity issues borne by events like war and pandemic.

But, do you really care about it as an individual? How will these measures impact you? Is there any relationship between household economies and the macroeconomics of the countries? Is there anything to consider before making any financial decision?

To answer these questions, first, we need to understand what RBI monetary policy is.

Monetary policy is a plan under which the central bank of India, RBI, takes necessary measures to ensure the economic growth and stability of the country. These measures help the RBI to influence the demand and supply of money to stabilise inflation for the time being.

RBI uses several economic tools to control the disturbing economic activities in the country, like changes in repo rates, CRR, SLR, and engaging in open market operations of selling or buying government securities as per the economic requirements.

What is the frequency of reviewing the decisions?

RBI reviews and comes up with a few changes in its existing policies through bi-monthly monetary policy. The very next meeting is scheduled between 28th September to 30th September, in which it is expected that RBI might increase interest rates by 50 bps.

Before RBI comes up with new changes in rates and measures to control the prevailing inflation in the country, let's understand how RBI's decisions might affect our financial health and stability.

What are RBI monetary policy tools to control inflation, demand and supply of money in the country and how do they affect us?

Majorly there are the following tools through which RBI controls the prevailing conditions in the country:

CRR

The cash reserve ratio is a rate at which commercial banks are mandated to keep it as a reserve with the RBI. It is a share of commercial bank's total deposits which is not allowed to lend to their customers. It has to be maintained with the RBI in a liquid form.

SLR

A statutory liquidity ratio is a rate at which commercial banks have to keep a reserve of liquid assets, like cash, government securities and gold. These reserves are not to be maintained with the RBI. Commercial banks are required to keep it with themselves.

Repo rate

A Repo rate is a rate at which central banks lend money to commercial banks in the case of need. RBI increases and decreases such interest rates in order to control the money supply in the country.

Reverse repo rate

The reverse repo rate is a rate at which RBI borrows money from the commercial banks of the country. Contrary to the other monetary policy tools, RBI decreases the reverse repo rates at the time of excess money supply in the country and high inflation rate. Consequently, commercial banks are left with less money to lend.

How do the increase and decrease in these rates affect us?

In the case of a high inflation rate due to excess money supply in the country, RBI increases these rates except reverse repo rates. When rates increase, banks are not left with much money to lend. Consequently, commercial banks increase their interest rates on loans, which will make borrowing expensive for you as an individual.

For example: If you are looking to take a home loan in the current economic situation, the RBI hike in interest rates will prove to be heavy on your pockets. RBI's hike in interest rates will make commercial banks hike their lending rates too. Consequently, an increased lending rate would affect your monthly EMI. You have to pay more EMI due to increased interest rates on loans than before.

By concluding it, we can say that RBI measures to control inflation, demand, and supply in the country are directly related to the individuals of the country. In order to take the right financial decisions, you must consider RBI's current rates that are affecting your financial stability.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.
 

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First Published: 30 Sep 2022, 08:24 AM IST