Question

Read the passage below and answer the questions that follow.

On the basis of an assessment of the macroeconomic situation in the economy, the Monetary Policy Committee of the RBI takes decisions about various policy rates. In recent years, these rates have been reduced to stimulate economic growth in the economy. Consequently, repo rates, reverse repo rates and cash reserve ratios were reduced. However, in view of the persistent inflationary pressure in the economy, the MPC has decided to increase the policy rates-mainly the repo rate to 4.9 per cent and Bank Rate to 5.1 per cent ensure that inflation remains within the target. CMPC minutes of June 8, 2022)

1. What is the function of the Monetary Policy Committee?   [2]
2. What are the two objectives of MPC?     [2]
3. Distinguish between repo rate and reverse repo rate.    [2]
4. Distinguish between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).     [2]

Answer 1

1. Function of the Monetary Policy Committee (MPC):
   • Fixing the Repo Rate:
     MPC decides the key policy rate (repo rate) to control inflation and maintain price stability.
   • Supporting Economic Growth:
     While controlling inflation, it also ensures sufficient credit flow to promote economic growth.
2. The main objectives of monetary (credit) policy are:
   1. Economic growth
   2. Price stability
   3. Attainment of full employment
   4. Balance of payments equilibrium
   5. Stability in the rate of foreign exchange
   6.  Growth with equity.
3. 
   

   Basis	Repo Rate	Reverse Repo Rate
   Meaning	The rate at which the Reserve Bank of India (RBI) lends money to commercial banks.	The rate at which the RBI borrows money from commercial banks.
   Objective	To control inflation and liquidity by making borrowing costlier or cheaper for banks.	To control excess liquidity in the economy by absorbing funds from banks.
   Impact	An increase in the repo rate makes loans expensive for customers.	An increase in the reverse repo rate encourages banks to park more funds with the RBI.
   Who borrows?	Commercial banks borrow from RBI.	RBI borrows from commercial banks.

4. 
   

   Basis	Cash Reserve Ratio (CRR)	Statutory Liquidity Ratio (SLR)
   Meaning	Percentage of a bank’s total deposits that must be kept with the RBI in cash form.	Percentage of a bank’s total deposits that must be maintained in the form of liquid assets like gold, government securities, and cash.
   Form	Only cash is kept with the RBI.	Liquid assets (cash, gold, approved securities) are kept with the bank itself.
   Objective	To control liquidity in the economy by regulating the cash flow.	To ensure the bank’s solvency and to control inflation and credit expansion.
   Maintained With	Reserve Bank of India (RBI).	With the bank itself, not with RBI.