Monetary policy

As per the RBI Act 1934 (amended 2016), the Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years.
Accordingly, the Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
As per the Act, the CPI Combined published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation is used as inflation targeting index.

Statement 1 is correct. In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
Statement 2 is incorrect. Under the amended RBI Act: The Monetary Policy Committee consists of the following Members:
–the Governor of the Bank—Chairperson, ex officio;
–Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;
–One officer of the Bank to be nominated by the Central Board—Member, ex officio; and
–Three persons to be appointed by the Central Government—Members.
The Monetary Policy Committee (MPC) is required to meet at least four times in a year.
-The quorum for the meeting of the MPC is four members.
-Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

Both statements are correct.
Open Market Operations (OMOs) are the market operations conducted by the RBI by way of sale/ purchase of G-Secs to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

Statement 1 is correct. As inflation increases, the prices of goods increase too. Due to this, the purchasing power of money falls. Cost Inflation Index (CII) is a tool used in the calculation of an estimated yearly increase in an asset’s price as a result of inflation.
Statement 2 is correct. The Central Government fixes this index and publishes it in its official gazette for measuring inflation. This index, notified each year by the CBDT is mandated under Section 48 of the Income Tax Act, 1961.
CII has a base year concept, currently the base year is 2001 having CII of 100. CII for 2020-21 has been notified at 301.

Both statements are correct.
The Labour Bureau, an attached office of the M/o Labour & Employment, has been compiling Consumer Price Index for Industrial Workers every month on the basis of the retail prices of selected. The index is compiled for 78 centres and All-India and is released on the last working day of succeeding month.
The Labour and Employment Ministry has recently revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.
The number of items directly retained in the index basket has increased to 463 items as against 392 items in the 2001 series. The weight to food and beverage was reduced from 46.2% to 39%, while spending on housing increased from 15.2% to 17%.

Statement 1 is correct. In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

Statement 2 is incorrect. Under the amended RBI Act: The Monetary Policy Committee consists of the following Members:

–the Governor of the Bank—Chairperson, ex officio;

–Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;

–One officer of the Bank to be nominated by the Central Board—Member, ex officio; and

–Three persons to be appointed by the Central Government—Members.

The Monetary Policy Committee (MPC) is required to meet at least four times in a year.

-The quorum for the meeting of the MPC is four members.

-Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

Statement 1 is correct. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.

In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.

Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from 2016 to 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

Statement 2 is correct. Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC).

The Monetary Policy Committee consists of the following Members:

-Governor of the Bank—Chairperson, ex officio;

-Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;

-One officer of the Bank to be nominated by the Central Board—Member, ex officio; and

-Three persons to be appointed by the Central Government—Members

The RBI has made it compulsory for banks to link their new floating rate home, auto and MSME loans to an external benchmark so that the borrowers can enjoy lower rate of interest. All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following:

• Reserve Bank of India policy repo rate
• Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
• Government of India 6-Months Treasury Bill yield published by the FBIL
• Any other benchmark market interest rate published by the FBIL.

There are several direct and indirect instruments that are used for

implementing monetary policy.

• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight

liquidity to banks against the collateral of government and other approved securities

under the liquidity adjustment facility (LAF).

• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs

liquidity, on an overnight basis, from banks against the collateral of eligible

government securities under the LAF.

• Marginal Standing Facility (MSF): A facility under which scheduled commercial

banks can borrow additional amount of overnight money from the Reserve Bank by

dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal

rate of interest. This provides a safety valve against unanticipated liquidity shocks to

the banking system.

• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily

movement in the weighted average call money rate.

• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount

bills of exchange or other commercial papers. The Bank Rate is published under

Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the

MSF rate and, therefore, changes automatically as and when the MSF rate changes

alongside policy repo rate changes.

• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to

maintain with the Reserve Bank as a share of such per cent of its Net demand and

time liabilities (NDTL) that the Reserve Bank may notify from time to time in the

Gazette of India.

• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to

maintain in safe and liquid assets, such as, unencumbered government securities,

cash and gold. Changes in SLR often influence the availability of resources in the

banking system for lending to the private sector.

• Open Market Operations (OMOs): These include both, outright purchase and sale

of government securities, for injection and absorption of durable liquidity,

respectively.

• Market Stabilization Scheme (MSS): This instrument for monetary management

was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.

Negative rate policy.

• Under a negative rate policy, financial institutions are required to pay interest for parking excess reserves with the central bank.
• That way, central banks penalize financial institutions for holding on to cash in hope of prompting them to boost lending.
• The euro area, Switzerland, Denmark, Sweden and Japan have allowed rates to fall slightly below zero.

The Reserve Bank of India (RBI) will simultaneously buy and sale government securities worth ₹10,000crore each in December 2019 under its open market operations — a move aimed at managing the yields.

 The RBI will purchase the longer-term maturities, that are trading at a spread of 150 bps (basis points) over the repo rate, so that the yield of these papers will soften and sell the shorter duration ones.

 The central bank said it will buy ₹10,000 crore of 6.45% government bonds maturing in 2029 and simultaneously sell ₹10,000 crore of short-term bonds maturing in 2020.

 Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.

The Reserve Bank of India (RBI) board finalized a three- year roadmap to improve regulation and supervision, among other functions of the central bank.

This medium term strategy — named Utkarsh 2022 — is in line with the global central banks’ plan to strengthen the regulatory and supervisory mechanism

Market Stabilisation Scheme or MSS is a tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.

 The money raised under MSS is kept in a separate account called MSS Account and not parked in the government account or utilized to fund its expenditures.

 The Reserve Bank under Governor YV Reddy initiated the MSS scheme in 2004, to control the surge of US dollars in the Indian market; RBI started buying US dollars while pumping in rupee.

 This eventually led to over-supply of the domestic currency raising inflationary expectations. MSS was introduced to mop up this excess liquidity.

LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities. Basically LAF enables liquidity management on a day to day basis

The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises.

 The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.

 The cash reserve is either stored in the bank’s vault or is sent to the RBI.

 Banks do not get any interest on the money that is with the RBI under the CRR requirements.

 Unlike Statutory Liquidity Ratio or SLR, which can be maintained in either gold or cash, CRR needs to be maintained only in cash.

Monetary transmission is the pass-through of the RBI’s rate actions to the economy at large.

 As you know, the RBI’s most important task is to keep tabs on inflation by adjusting money supply.

 It also monitors the exchange rate. To control all this, the RBI uses many monetary tools.

 The repo rate, reverse repo rate and cash reserve requirement are being the key instruments.

 Let us take the repo rate, for instance. This is the rate at which the RBI lends short-term funds to banks to manage their day-to-day operations.

 When the RBI wants to stimulate growth, it cuts the repo rate to reduce the cost of borrowings.

 Banks get money at a cheaper rate. If this is passed on to borrowers, then monetary transmission is said to have happened smoothly.

Major policy objectives in regard to forex reserves:

-maintaining confidence in monetary and exchange rate policies,

-enhancing capacity to intervene in forex markets,

-limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks

during times of crisis including national disasters or emergencies;

-providing confidence to the markets especially credit rating agencies that external

obligations can always be met, thus reducing the overall costs at which forex resources are

available to all the market participants, and

-incidentally adding to the comfort of the market participants, by demonstrating the

backing of domestic currency by external assets.

Statement 1 is correct. As per the Reserve Bank of India Act; the Central

Government shall, in consultation with the Bank, determine the inflation target in terms

of the Consumer Price Index, once in every five years. Further, the Monetary Policy

Committee shall determine the Policy Rate required to achieve the inflation target.

Statement 2 is correct. The Monetary Policy Committee consists of:

-the Governor of the Bank—Chairperson, ex officio;

-Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;

-One officer of the Bank to be nominated by the Central Board—Member, ex officio; and

-Three persons to be appointed by the Central Government—Members.

No person shall be appointed as a Member, in case such person:

-has completed the age of seventy years on the date of appointment as Member;

-is a Member of any Board or Committee of the Bank or is an employee of the Bank;

-is a public servant as defined under the Indian Penal Code;

-is a Member of Parliament or any State Legislature;

-has been at any time, adjudged as an insolvent;

-has been convicted of an offence which is punishable with an imprisonment for a term of

one hundred and eighty days or more;

-is physically or mentally incapable of discharging the duties of a Member of the Monetary

Policy Committee; or

-has a material conflict of interest with the Bank and is unable to resolve such conflict.

# ‘the Bank’ above means the Reserve Bank of India.

In 2016, the government provided statutory backing to the Monetary Policy

Committee (MPC) by notifying amendments to the RBI Act, 1934.

Statement 1 is correct. As per the act the Monetary Policy Committee determines the Policy

Rate required to achieve the inflation target. Further the decision of the Monetary Policy

Committee is binding on the Reserve Bank of India.

Statement 2 is correct. The Monetary Policy Committee consists of:

– Governor of the RBI—Chairperson, ex officio;

– Deputy Governor of the RBI, in charge of Monetary Policy—Member, ex officio;

– One officer of the RBI to be nominated by the Central Board—Member, ex officio; and

– Three persons to be appointed by the Central Government—Members.

The Members of the Monetary Policy Committee appointed by the Central Government hold

office for a period of four years and are not eligible for re-appointment.

Both statements are correct.

India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI inflation, as the primary objective of the monetary policy.

In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.