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