ADVANTAGES & DISADVANTAGES OF MONETARY POLICIES

The term ‘credit control’ refers to the adjustment made by the rbi
in other commercial advances to the needs of trade and
commerce for price and exchange stability.
Advantages :-
1. A primary advantage is the speed with which changes can be
implemented. Unlike fiscal policy — which could take
months to implement .
2. A second advantage of using monetary policy is its flexibility
with regard to the size of the change to be implemented.
Reserves can be increased or decreased in small or large
increments.
3. It can help promote stable prices, which are very helpful in ensuring
inflation rates will stay low throughout the country and even the
world. A low inflation rate would allow us to make the best financial
decisions in life without worrying about prices to drastically rise
unexpectedly.

Disdvantages :-
1. During recessions, not all consumers would have the confidence
to spend and take advantage of low interest rates, making it a
disadvantage.
2. With this policy, interest rates can still increase, making
businesses not willing to expand their operations, resulting to less
production and eventually higher prices. 
3. The R.B.I. can increase reserves to stimulate economic
activity as much as it wants, but the reserves themselves
do not alter the money supply.

For the money supply to increase someone must be

willing to borrow and a bank must be willing to lend.
Because the R.B.I. cannot force the loan-making process.
SHORT-TERM AND LONG TERM IMPLICATIONS
OF ECONOMIC STRATEGIES

Policy: a) Repo rate reduced to 4.4%.

By reducing the repo rate the RBI
displayed that it is ready to provide
lending to banks at a cheaper rate.

Short term impact:

1. This will help the banks to get the loan and funds from
RBI at a cheaper rate. Further, it will also help them to
manage funds in the situation of panic, if arose in the
market.

Long Term impact:

1. Reduction in Policy Repo Rate will also impact the

Bank's Lending Rate. Reduced Interest rates on loans
will also reduce the earnings of banks.

2. Already most of the banks are running on fumes due to

NPAs and losses and hence this will further deteriorate
the position of the financial sector in the long run.

b) Reverse
Repo rate reduced to 4.0%
The logic of RBI is that this will
discourage the banks from depositing the
money with RBI and it will encourage
them to lend the same in the open
market.
 Short term impact:
1. As per RBI, this should encourage the banks to lend
more to the market. If that happens, then short term
liquidity crisis go off.

Long term impact:

1. Now the point comes that the Bank lends on
BPLR (Benchmark Prime Lending Rate) which will
also fall with the fall of Policy Rate and Reverse
Repo Rate.

2. Further, people are suffering from a liquidity

crisis at the current moment. And, if this COVID-
19 Pandemic continued for longer-term then
people will fear for job loss also.

3. In that scenario, the demand will sharply fall due

to inadequate funds with the public or due to
unemployment. (You save more in cash when
you see a crisis in future and you expend less).

4. The lower the demand, the lower will be the sale,

which in turn will reduce the profitability of the
manufacturers and corporates. This will hamper
their existing debt service capacity and they will
fall under the trap of excessive debt burden.

5. Hence, lesser loans by banks mean lesser interest

incomes they will earn and higher NPAs losses
they have to sustain upon themselves.
 c ) Five Long Term Repo
operations amounting to Rs1,25,000
CR & Upcoming (TLTRO).
 Long Term Repo Operations i.e. LTRO is nothing but the
lending by the RBI at the lower repo rate for a longer term
of one to three years through auction.

 This means more loan has been given to the banks of Rs.
1,25,000 for a period of one to three years at the lower
rates to maintain liquidity with them.

 Further, RBI will also auction of TLTRO of Rs. 1,00,000 crore

at the floating rate linked with the repo rate. That in turn
banks have to invest in the bonds and NCD of the
companies.

Short term impact:

1. This will improve the banks short term
financial stability as this will provide cash in
the hand of banks to adhere to their Time and
Demand Liabilities.

2. Further, it will help corporates as banks will be

ready to subscribe to their NCDs or will be
ready to discount their commercial papers.

Long term Impact:

 1. In a longer period, excessive debt will only
create a crisis. Excessive debt means excessive interest
burden. And, if the economy falls in the recession then this
excessive debt will be like the last nail in the coffin of
growth.

CAUSES AND CONSEQUENCES OF MONETARY

POLICIES BY RBI
The causes of this monetary policies are due the
impact of COVID-19( Delta variant) on the economy. Delta variant
and the threats of new variants have increased uncertainties of
overcoming the pandemic. This is also making policy choices
difficult with multidimensional challenges of subdued employment
growth, rising inflation, food insecurity and setback to human capital
accumulation leaving very little room to manoeuvre

Accommodative monetary policy by the RBI has helped

ease liquidity measures giving households access to money. 
Since the pandemic, repo and reverse repo rates were cut by
115 and 155 basis points (bps) to 4 and 3.35%, respectively,
building on the pre-pandemic easing of 135 bps; the cash
reserve requirement was reduced by 100 bps. The
accommodative policy stance was aided by both time- and
state-contingent forward guidance on policy rates and, more
recently, on asset purchases, to better anchor market
expectations amid unprecedented uncertainties.

Various liquidity measures resulted in a cumulative

injection of over 6 percent of GDP during February 2020 – 2021
and helped avoid a broad-based liquidity crunch for both
financial and nonfinancial corporates. The impact of the
 announcement of asset purchases on longer-term yields has
been in line with that in other emerging markets. 

In the most recent RBI monetary policy released in

October 2021, the policy rates were left unchanged. Repo rate
continued at 4% while reverse repo and MSF remained at
3.35% and 4.25% respectively.  The rebound in economic
activity gained traction in August-September led by retreating of
infections, easing of restrictions and a sharp pick-up in the pace
of vaccination.

According to the RBI, the total monetary support extended globally

by central banks is estimated to be about US$18.0trillion as of
August 2021. This support has been predominantly in the form of
asset purchases, around US$11.6 trillion, followed by lending
operations of US$4.4 trillion. The policy stance has remained
divergent across countries with a few major AEs and EMEs
maintaining an accommodative stance while the others beginning or
continuing withdrawal of monetary stimulus .