How does monetary policy steer your investments?
01 Jul 2022

How does monetary policy steer your investments?

Monetary policy can influence a country’s rate of economic growth, employment, inflation, and currency exchange rates. If an economy is facing a downturn, the nation’s central bank would attempt to increase production, jobs, and consumer demand by cutting interest rates. This works to reduce the cost of credit and potentially increase the supply of money in circulation. Conversely, if there is runaway inflation, asset price spikes, or excessive lending taking place, policymakers will attempt to introduce demand. This will be done by moderating measures to restore economic and financial stability.

In India, monetary and exchange rate policy is conducted by the Reserve Bank of India (RBI).

How does Monetary Policy work?

How does Monetary Policy work

India’s monetary policy measures during COVID-19

As India battled the global COVID-19 pandemic, the Reserve Bank of India (RBI) set a three-part goal: reducing the virus's negative impacts, restarting growth, and maintaining financial stability. While keeping a check on the credit policy, RBI’s monetary policy focused upon the rate decision and the announcements for the financial sector. 

Furthermore, the repo rate, cash reserve ratio, open market operations, and other policy instruments are used by the RBI to sustain the country's stable economic growth. In this aspect, the repo rate was kept constant at 4% by the monetary policy committee on 9th February 2022. Simultaneously, the cash reserve ratio was decreased in order to provide additional liquidity to the banking industry.

Apart from that, a debt recast window was established for borrowers affected on 9th February 2022 itself by the epidemic in the financial industry and the RBI still continues to implement policy actions in response to COVID-19's consequences.

How does monetary policy impact investments?

The policies alter the supply of money in circulation and influence interest rates, affecting consumer and business confidence and their spending and investment decisions.



Key pitfalls of monetary policies

The policy’s effectiveness could potentially be compromised due to:

Key pitfalls of monetary policies

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This article is for information purposes only. We recommend you get in touch with your investment advisor for any financial advise.

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