Intervention by RBI

A central bank such as the Reserve Bank of India (RBI), periodically intervenes in the debt market to influence the interest rates and rate of inflation in the economy. 

If RBI feels inflation is too high, it will sell government securities, and suck money out of the system. This act will push up interest rates in the economy, and businesses will cut back on capital expenditure financed by loans, reducing the demand for money.

Central banks also intervene periodically in foreign exchange markets.

If the rupee is rapidly depreciating, RBI will sell dollars in the market. This will increase the supply of dollars and the demand for rupees, causing the rupee price of the dollar to come down. 

On the contrary, if the rupee is rapidly appreciating, RBI will buy dollars and inject rupees into the economy. This will increase the demand for dollars and the supply of rupees, thereby leading to an increase in the rupee price of the dollar.

If interest rates in the US or the EU were to fall, FIIs (Foreign Institutional Investors) will ramp up investments in India. The resultant demand for rupees will cause the rupee to appreciate. In response, RBI will buy dollars and inject rupees into the system.

Source: VisionIAS

Repo Rate, Reverse repo rate, Cash Reserve Ratio (CRR) Rate

The interest rate that the RBI charges when commercial banks borrow money from it is called the repo rate.

• when the RBI wants to encourage economic activity in the economy, it reduces the repo rates. This indicates to people spend money.

Reverse repo rate

• The interest rate that the RBI pays commercial banks when they park their excess cash with the central bank.

 The repo rate is higher than the reverse repo rate.

Cash Reserve Ratio (CRR) Rate

• The Cash reserve ratio is a certain percentage of cash that all banks have to keep with the RBI as a deposit.

Monetary Policy Committee (MPC)

• Monetary Policy managed by MPC
• Headed by RBI Governor
• 6-member committee
• 3- from the RBI, three members will be appointed by the central government. 

INFLATION

• The rate at which prices rise
• The inflation target of the Reserve Bank of India is 4% (+/- 2%).
• India is a current account deficit country, therefore depreciation is bad,  making imports more expensive.

PYQs

Which of the following statements is/are correct regarding the Monetary Policy Committee(MPC)? [CSE 2017]

1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below:

(A) 1 only

(B) 1 and 2 only

(C) 3 only

(D) 2 and 3 only

ANS:[A]

24th Financial stability Report(FSR)

• Released by RBI
• bi-annual report 
• reflects risks to financial stability