Take the pledge to vote

For a better tommorow#AajSawaroApnaKal
  • I agree to receive emails from News18

  • I promise to vote in this year's elections no matter what the odds are.
  • Please check above checkbox.


Thank you for
taking the pledge

Vote responsibly as each vote counts
and makes a diffrence


Issued in public interest by HDFC Life. HDFC Life Insurance Company Limited (Formerly HDFC Standard Life Insurance Company Limited) (“HDFC Life”). CIN: L65110MH2000PLC128245, IRDAI Reg. No. 101 . The name/letters "HDFC" in the name/logo of the company belongs to Housing Development Finance Corporation Limited ("HDFC Limited") and is used by HDFC Life under an agreement entered into with HDFC Limited. ARN EU/04/19/13618
LIVE TV DownloadNews18 App
News18 English
News18 » Business
2-min read

Monetary Policy Meaning and Definition | What is Monetary Policy and How is it Decided

News18 explains how the repo rate is changed and why you should care about them.


Updated:July 2, 2019, 11:01 AM IST
Monetary Policy Meaning and Definition | What is Monetary Policy and How is it Decided
Image for representation (Reuters)

Monetary policy is how a central bank or other agency governs the supply of money and interest rates in an economy in order to influence output, employment, and prices. Monetary policy can be broadly classified as either expansionary or contractionary.

The most important part of the policy are interest rates. News18 explains how the rates are changed and why you should care about them.

The rate in contention is the repurchase rate or the repo rate. This is the rate at which the Central Bank lends money to commercial banks, such as ICICI Bank, HDFC bank or State Bank of India (SBI) among others, in exchange for government securities.

Therefore, a rate cut means a reduction in the rate of interest at which commercial banks borrow money from the RBI. If there is a slump in rates, the banks can go on to furnish loans at lower interest rates to individuals and the industry.

Similarly, when the apex bank raises its repo rates, banks then, in order to maintain their profit margins, have to raise the rate of loan disbursal.

Why should you be concerned about these rates?

A slashed repo rate corresponds to businesses borrowing at cheaper rates from the banks. Similarly, individuals borrowing from the formal sector also gain from cheaper credit if rate cuts by the RBI get passed on to them through consumer loans.

However, there is a downside to this as well. A rate cut can increase liquidity in the economy and hence spike up the cost of goods and services.

Who decides if rates should be changed?

A six-member monetary policy committee, with three top RBI officials (including the governor and deputy governor) and three government nominees who meet once in every two months, are responsible for deciding the repo rate.

The members vote on proposals and in cases of a tied vote, the RBI governor, who is also the chairperson of the committee, gets the deciding vote.

Until 2016 the decision would solely be taken by the RBI governor, who would then decide whether to go for a rate cut after consulting with a technical advisory committee.

What are the major factors that influence the committee’s decision on the rate?

The MPC of RBI forecasts the state of the economy and inflation levels for nine to twelve months in advance while deciding on whether or not to change interest rates. In case there is an inflationary trend that the RBI forecasts, then it lowers its rates to counterfeit the effect.

If the forecasts say that liquidity, that is the amount of money in the economy, is too high then the RBI raises its rates to curb it. The higher the liquidity, the more chances are that inflation might set in.

Inflation levels, capital investment in the country, along with certain global factors are the primary determinants of change in repo rates.

Get the best of News18 delivered to your inbox - subscribe to News18 Daybreak. Follow News18.com on Twitter, Instagram, Facebook, Telegram, TikTok and on YouTube, and stay in the know with what's happening in the world around you – in real time.

Read full article
Next Story
Next Story

Also Watch

Most Active
Company Price Change %Gain
20 Microns 38.25 0.39
Hexaware Tech 368.65 3.22
Atul 3,993.40 2.49
Amrutanjan Heal 348.80 0.46
Company Price Change %Gain
Bajaj Finserv 8,159.40 -0.51
ABC Gas 8.65 0.00
Bharat Elec 105.05 -0.57
Baroda Extrusio 0.27 0.00

Live TV

Countdown To Elections Results
To Assembly Elections 2018 Results