Top Commerce coaching classes Behere Classes Series on Basics of Economics Part 8: Quantitative Instruments of Monetary Policy Monetary policy refers to the credit-control measures adopted by the central bank of a country i.e. RBI in the case of India. The main objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition for sustainable growth. Various instruments are used by RBI to achieve this objective. There are two types of instruments of monetary policy used by the RBI: 1. Quantitative, general or indirect (e.g. CRR, SLR, Open market operations, bank rate, the repo rate, reverse repo rate) 2. Qualitative, selective or direct (e.g. change in the margin money, direct action, moral suasion) In this article, we will be discussing the quantitative tools used by RBI. ➤ REPO AND REVERSE REPO RATE Repo is a transaction operation wherein securities are sold by the RBI and simultaneously repurchased at a fixed price. This fixed price of the repurchase is determined in context to an interest rate called the repo rate. The transaction is mostly relevant for banks; when they need funds from the RBI, the central bank repurchases the securities. The higher the repo rate, the more costly are the funds for banks and hence, higher will be the rate that banks pass on to customers. High rate signals that access to money is expensive for the banks; hence, lesser credit will flow into the system and that helps bring down liquidity in the economy. This will ultimately bring down inflation.(Similarly, RBI lowers the repo rate to inject the liquidity in the market, so as to accelerate the consumption) ➤ CASH RESERVE RATIO (CRR) CRR is the percentage of a bank’s total deposit that needs to be kept as cash with the RBI. The central bank can change the ratio to a limit. A high CRR means banks have to put more money with RBI resulting in lesser lending, which curbs liquidity; whereas, a low CRR does the opposite. The RBI has the power to reduce or raise CRR to tighten or ease liquidity as the situation demands. ➤ OPEN MARKET OPERATIONS This refers to buying and selling of government securities by RBI to regulate the short-term money supply. If RBI wants to induce liquidity into the system, it will buy the government securities and inject funds, and if it wants to curb the amount of money out there, it will sell these securities to banks, thereby reducing the amount of cash that banks have with them. RBI uses this tool actively even outside of its monetary policy review to manage liquidity on the regular basis. ➤ STATUTORY LIQUIDITY RATIO (SLR) SLR is the percentage of banks’ total deposits that they must invest in government-approved securities. The lesser the amount of SLR, the more funds banks have which they can lend outside. ➤ BANK RATE This is the re-discounting rate that the RBI extends to banks against securities such as bills of exchange, commercial papers or any other approved securities. Earlier it was an import policy instrument but in recent years, it has been the repo rather than the bank rate that has acted as a guideline for banks to set their interest rates. In addition to these measures, RBI also uses many qualitative tools to regulate credit flow. These tools will be discussed in the next article until then, stay connected! Thank You. Tags: Best 11th commerce classes in Pune, 11th commerce class in Pune, top commerce coaching in pune, Commerce classes in Pune city, 12th commerce classes in Pune, 12th commerce class in Pune, commerce classes near me, best commerce classes near me, 11th 12th commerce classes near me, BBA coaching classes in Pune, BBA classes near me, BCom classes in Pune, BCom classes near me, BBA tuitions near me, Pune 11th commerce classes, tuitions for 11th commerce, CA foundation classes, CS foundation classes, best CA foundation classes, best CS foundation classes, BCom tuitions near me, commerce tuitions near me, classes for 11th commerce, CA classes in Pune