Monetary Policy: 2022 so far upto 2023-Sept

Question 1

Describe the general trend of repo rate changes implemented by the RBI between April 2022 and September 2023.

Answer 1

The RBI has demonstrated a consistent pattern of increasing the repo rate during this period. This trend reflects an effort to control inflation.

Question 2

What is the repo rate, and how does it function within monetary policy?

Answer 2

The repo rate is the interest rate charged by a country’s central bank (like the RBI in India) when it lends money to commercial banks. It’s a key tool in monetary policy; by raising or lowering the repo rate, the central bank influences borrowing costs, spending, and ultimately, inflation.

Question 3

Why did the RBI increase the repo rate between 2022 and early 2023?

Answer 3

The RBI increased the repo rate to combat rising inflation. When inflation rates get too high, the central bank can raise interest rates to slow down economic activity. This makes borrowing more expensive and encourages saving, ultimately reducing demand and helping to bring prices back under control.

Question 4

What are the relationships between the repo rate, SDF, and MSF?

Answer 4

SDF (Standing Deposit Facility): The interest rate banks earn for parking excess funds with the RBI. It’s usually 0.25% below the repo rate.
**MSF (Marginal Standing Facility): ** The rate banks pay for emergency overnight borrowing from the RBI. It’s usually 0.25% above the repo rate.
These rates work with the repo rate to form a corridor that helps the RBI steer short-term interest rates in the economy.

Question 5

Aside from adjusting interest rates, what other tools can a central bank use to influence the economy?

Answer 5

Open Market Operations: Buying or selling government securities to increase or decrease money supply.
Reserve Requirements: Changing the amount of money banks must hold in reserve.
Quantitative Easing (QE): Buying large amounts of long-term bonds to lower long-term interest rates and encourage lending.