The central bank issues and regulates currency notes. It keeps reserves with a view to securing monetary stability and is called a banker to banks. It regulates and supervises banks and other financial institutions. The RBI plays a vital role in the economic growth of the country and maintaining price stability.
Monetary Policy of the country:
– The RBI has been tasked to have a modern monetary policy framework to meet the challenges of an increasingly complex economy and to maintain price stability while keeping in mind the objective of growth.
Operation twist: The interventions involve the RBI buying longer-dated government bonds, while simultaneously selling an equivalent amount of shorter-dated securities – pushing down long-term Gsec yields, and exerting upward pressure on short-term yields as a consequence.
In doing so, the RBI ended up doing exactly the opposite of what the MPC was trying to achieve by cutting short term rates.
The RBI’s interventions in the currency market: Intervening in order to prevent the rupee from appreciating – have constrained its ability to carry out open market operations as these would have led to further liquidity injections into the system.
Conflict: The RBI’s debt management functions have run up against its currency management functions.
Therefore given the slowdown in the economy and that the transmission of rate cuts takes time, there is the need for further Monetary policy easing. This will also be helpful as uncertainty remains over whether Covid having a deflationary or inflationary impact on the Indian economy in the medium term.