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RBI Monetary Policy

The Reserve Bank of India, in its monetary policy meet decided to keep the key policy rates unchanged after two emergency rate cuts amid the COVID- 19 disruptions and its ensuing economic fall out. Consequently, the repo rate stands unchanged at 4% and the reverse repo rate at 3.35%. RBI noted that the economic activity had started to recover from the lows of April-May. Meanwhile, migrant labor is returning to work in urban areas, and factories and construction activities are coming back to life. This is also reflected in rising levels of energy consumption and population mobility. In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices. The mood of the nation has shifted from fear and despair to confidence and hope. Some of this optimism is being reflected in people's expectations. In September 2020, round of the RBI's survey, households expects inflation to decline modestly over the next three months, indicative of hope that supply chains are mending.

Which of the following is not a monetary measure adopted by Reserve Bank of India?

Change in Public Expenditure.

The correct answer is Option (3) → Change in Public Expenditure.

A change in public expenditure is not a monetary measure. It is a fiscal policy measure adopted by the government, not by the RBI. Public expenditure refers to government spending on infrastructure, subsidies, salaries, and welfare schemes. It is used to influence aggregate demand and economic activity, especially during times of recession or inflation.

The Cash Reserve Ratio (CRR) refers to the percentage of a commercial bank’s total deposits that must be kept with the Reserve Bank of India in the form of cash reserves. This is a monetary measure adopted by the RBI to control liquidity in the economy. When the CRR is increased, banks have less money to lend, which reduces the money supply. Conversely, lowering the CRR allows banks to lend more, increasing the money supply.

A change in the Bank Rate is also a monetary policy tool. The bank rate is the interest rate at which the RBI lends funds to commercial banks. If the RBI raises the bank rate, borrowing becomes more expensive for banks, which may lead them to raise their own lending rates to the public, thereby reducing borrowing and overall spending in the economy. Lowering the bank rate has the opposite effect and encourages borrowing.

Open Market Operations (OMO) are another important monetary policy instrument used by the RBI. OMOs involve the buying and selling of government securities in the open market. When the RBI sells securities, it withdraws money from the banking system, reducing the money supply. When it buys securities, it injects money into the system, increasing liquidity.