Why In News? 

The Monetary Policy Committee (MPC), led by the new RBI Governor Sanjay Malhotra, held its meeting from February 5 to 7, with the credit policy decision set to be announced today, February 7. 

 Monetary Policy 

• Definition: Refers to the central bank's policy using monetary tools to achieve goals outlined in the RBI Act. 
• Objective: Primary goal is to maintain price stability while fostering growth. Price stability is necessary for sustainable growth. 
• Inflation Target: Set at 4% ± 2%, reviewed every 5 years by the Government of India in consultation with the RBI. 

Instruments of Monetary Policy 

• Repo Rate: Interest rate at which the RBI provides overnight liquidity to banks against collateral. 
• Reverse Repo Rate: Interest rate at which the RBI absorbs liquidity from banks overnight. 
• Liquidity Adjustment Facility (LAF): Includes overnight and term repo auctions to develop the interbank market and improve monetary policy transmission. 
• Marginal Standing Facility (MSF): Allows banks to borrow additional money overnight from the RBI using their SLR portfolio at a penal rate. 
• Corridor: The MSF and reverse repo rates set the range for the weighted average call money rate. 
• Bank Rate: Rate at which RBI buys or rediscounts commercial papers; aligned with MSF and repo rate. 
• Cash Reserve Ratio (CRR): Percentage of banks' net demand and time liabilities (NDTL) required to be maintained with the RBI. 
• Statutory Liquidity Ratio (SLR): The share of NDTL banks must keep in safe and liquid assets like government securities. 
• Open Market Operations (OMOs): Purchase and sale of government securities to manage liquidity. 
• Market Stabilisation Scheme (MSS): Used to absorb surplus liquidity from capital inflows through the sale of short-dated government securities. 

Monetary Policy Committee (MPC) 

• Origin: Formed under Section 45ZB of the amended RBI Act, 1934. 
• Objective: Determines the policy rate to meet the inflation target. 
• Composition- 6 members, 
  • RBI Governor (Chairperson) 
  • Deputy Governor in charge of monetary policy 
  • An RBI officer nominated by the Board 
  • 3 members appointed by the government with expertise in economics, banking, finance or monetary policy. 

Monetary Policy Framework 

• Origin: Established in May 2016 through an amendment to the RBI Act. 
• Objective: Sets the repo rate based on macroeconomic conditions and adjusts liquidity to stabilize money market rates. 
• Reason for Repo Rate: Repo rate changes affect the money market and financial system, influencing inflation and growth.