Monetary Policy - All you need to know!!

Today is the day of Monetary policy by RBI

Some of you may not be knowing what is monetary policy and how to understand it..

some may be wondering this isn't related to our subject of major in accounting

our view is that being a student and aspiring finance professional you should be aware of what is going on in the country's/global economy to shape up your career in a bright way.

So here is an effort to give you insight on what actually monetary policy is and what is its impact?

Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy.

Price stability refers to controlled inflation

What do RBI generally do by monetary policy?

Cut Interest rates(Repo)-to increase money supply and thereby contributing to the GDP

By cutting interest rates people would like to borrow more and do business and hence it increases production and adds to GDP

Hike Interest rates(Repo)-to decrease money supply and thereby curb inflation

On hiking interest rates the people will prefer to repay the borrowings or avoid them thereby money supply will be reduced consequently higher demand and the inflation

RBI tries to balance inflation and money supply to give economy a steady growth

In a monetary policy the RBI also tries to control the lending by prescribing reserve and liquidity ratios

Apart from these RBI can increase / decrease money supply by buying/selling government securities respectively

What did RBI do today?

It has reduced Interest rate(Repo) by 25 basis points from 7.5% earlier to 7.25% now

Repo is the rate at which Banks borrow from RBI

Why did it do so?
The Inflation is in a decreasing trend
Industrial demand is in an increasing trend

What's its impact ?
Increase in GDP

The article aims to give you an basic idea for more clarity do google..