3. Monetary policy is the process by which monetary authority of a
country , generally central bank controls the supply of money in the
economy by its control over interest rates in order to maintain price
stability and achieve high economic growth
4. Monetary policy refers to the use of instruments under the control of the
central bank to regulate the availability, cost and use of money and credit.
5. The RBI aims to achieve its objectives of economic growth and control of
inflation through various methods.
General/ quantitative methods
Selective/ qualitative methods
6. These methods maintain and control the total quantity or volume of credit or
money supply in the economy.
Open Market Operations
Open market operations indicate the buying/ selling of govt. securities in the open
market to balance the money supply in the economy .
The RBI sells government securities to control the flow of credit and buys
government securities to increase credit flow. Open market operation makes bank
rate policy effective and maintains stability in government securities market.
7. Cash reserve ratio (CRR)
Cash Reserve Ratio is a certain percentage of bank deposits which banks are
required to keep with RBI in the form of reserves or balances. Higher the
CRR with the RBI lower will be the liquidity in the system and vice versa. RBI
is empowered to vary CRR between 15 percent and 3 percent. But as per the
suggestion by the Narsimham committee Report the CRR was reduced from
15% in the 1990 to 5 percent in 2002. As of 4 October 2016, the CRR is 4.00
percent.
Bank Rate Policy
The bank rate, also known as the discount rate, is the rate of interest charged
by the RBI for providing funds or loans to the banking system. This banking
system involves commercial and co-operative banks, Industrial Development
Bank of India, IFC, EXIM Bank, and other approved financial institutes
8. Every financial institution has to maintain a certain quantity of liquid assets
with themselves at any point of time of their total time and demand liabilities.
These assets have to be kept in non cash form such as G-secs precious metals,
approved securities like bonds etc. The ratio of the liquid assets to time and
demand assets is termed as the Statutory liquidity ratio
There was a reduction of SLR from 38.5% to 25% because of the suggestion by
Narsimham Committee. The current SLR is 20.50%
9. Liquidity Adjustment Facility (LAF):
Consists of daily infusion or absorption of liquidity on a repurchase basis,
through repo (liquidity injection) and reverse repo (liquidity absorption)
auction operations, using government securities as collateral.
i. Repo Rate:
Repo rate is the rate at which the RBI lends shot-term money to the banks
against securities. When the repo rate increases borrowing from RBI
becomes more expensive.
ii. Reverse Repo Rate:
The rate at which RBI borrows from commercial banks.
10. The RBI directs commercial banks to meet their social obligations through
selective/ qualitative measures.
These measures control the distribution and direction of credit to various sectors
of the economy.
CEILING ON CREDIT
MARGIN REQUIREMENTS
DISCRIMINATORY RATES OF INTEREST
12. There exist a non-monetized sector
Excess of non-banking financial institutions (NBFI)
Existence of unorganized financial market
Money not appearing in an economy
Time lag affects success of monetary policy
Monetary policy and fiscal policy lacks coordination
13. Inflation is broadly understood as the general rise in the prices of goods
and services year on year, inflation is a more complex phenomena
associated with the money supply and currency values.
