Monetary policy entails measures taken by the Reserve Bank of India to influence aggregate demand in the economy. The monetary policy affects output and prices through its influence on key financial variables such as interest rates, exchange rates, asset prices, credit and monetary aggregates in the future. Monetary policy actions, therefore, are forward looking. The Reserve Bank uses various policy levers, such as repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio and bank rate, to influence the amount of money in the market. An increase in any one of these could raise the interest rates.
• How do changes in interest rates affect monetary transmission?
By increasing or decreasing interest rates, thus raising or lowering the cost of holding cash for banks, RBI indicates that banks should increase or decrease rates for their customers. This change affects people's ability to borrow and lend money, thereby affecting overall demand and completing monetary transmission.
• How much time does it take for monetary policy to take effect?
The effect of monetary policy takes place after a lag and is also found to be variable. This depend on the state of the economy, amount of regulation, liberalisation and financial innovation in the economy. Research has shown that in India, monetary policy takes effect after a lag of 8-12 months. Also, experience has shown that tight liquidity conditions lead to faster transmission of monetary policy.
• How has RBI reacted in the recent past?
Inflation has been elevated for over a year and RBI has responded by raising the repo rate, or the rate at which it lends to banks, nine times. It has tried to bring down the aggregate demand. Lower demand acts as a check on rising prices.
DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT. The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...
