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All About Monetary And Credit Policy - 06

FEBRUARY 04, 2014

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 All About Monetary And Credit Policy - 06

What’s this monetary policy stuff?

The Reserve Bank of India formulates the monetary and credit policy to determine key indicators to stabilize prices in the economy. These factors include:


a) Money supply, commonly called M3 — which indicates the stock of legal currency in circulation in the economy

b) Interest rates

c) Inflation



Besides, the policy also provides the RBI a forum to announce the norms for financial bodies governed by it i.e. banks, financial institutions and non-banking finance companies. The RBI also spells out its view on the macro-economic situation.



How does it impact me as a person?
The interest costs of banks can change immediately as a result of policy changes. A fall in interest rates prompts the banks to lower their lending rates and borrowing rates too. So if you want to have a deposit with a bank or take a loan, it would offer you a lower rate of interest. On the other hand, if the interest rates increase, the banks would hike their lending and borrowing rates.




How does it affect the domestic industry and exporters, in particular?
Exporters keenly await the monetary policy since the RBI always makes an announcement on export refinance, i.e., the rate at which it lends to the banks which have advanced pre-shipment credit to exporters.



A lowering of these rates would mean lower borrowing costs for the exporters. The most important issue that the monetary policy has addressed until now has been interest rates. And since the rates of interest affect the borrowing costs of companies and consequently, their profitability, the monetary policy is very important to them.


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