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Monetary Policy

Monetary policy in India is controlled by the Reserve Bank of India and aims to maintain price stability and economic growth. Key tools of monetary policy include open market operations, cash reserve ratio, statutory liquidity ratio, bank rate policy, credit ceilings, and moral suasion to influence money supply, interest rates, inflation, and credit availability. The current repo rate set by the RBI is 7.5% while the reverse repo rate is 6.5%.

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60 views3 pages

Monetary Policy

Monetary policy in India is controlled by the Reserve Bank of India and aims to maintain price stability and economic growth. Key tools of monetary policy include open market operations, cash reserve ratio, statutory liquidity ratio, bank rate policy, credit ceilings, and moral suasion to influence money supply, interest rates, inflation, and credit availability. The current repo rate set by the RBI is 7.5% while the reverse repo rate is 6.5%.

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mbapriti
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Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money

in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth.In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are: Price Stability Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability. Controlled Expansion Of Bank Credit One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output. Desired Distribution of Credit Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers. Equitable Distribution of Credit The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

Monetary operationsMonetary operations involve monetary techniques which operate


on monetary magnitudes such as money supply, interest rates and availability of credit aimed to maintain PriceStability, Open Market Operations An open market operation is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks. This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit. The RBI sells government securities to contract 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. Cash Reserve Ratio 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 Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of January 2013, the CRR is 4.00 percent.[3] Statutory Liquidity Ratio 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 can be cash, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as the Statutory liquidity ratio.There was a reduction of SLR from 38.5% to 25% because of the suggestion by Narshimam Committee. The current SLR is 23%.[5] 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. Funds are provided either through lending directly or rediscounting or buying money market instruments like commercial bills and treasury bills Credit Ceiling In this operation RBI issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors. Few example of ceiling are agriculture sector advances, priority sector lending. Moral Suasion Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and measures in so and so trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation. Repo Rate and Reverse Repo Rate Indicator Current rate

Inflation

5.96%

Bank rate

9.5%

CRR

4.00%

SLR

23%

Repo rate

7.5%

Reverse repo rate

6.5%

Marginal Standing facility rate

9.5%

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