What do you understand by monetary policy? Discuss in brief the tools that are used by RBI to determine monetary policy in India. (250 Words)

Mains Answer Writing

Answer-

Monetary Policy refers to the actions taken by the monetary authority of a country with an objective to regulate money supply in the economy, attain price stability, promote economic growth, and to promote saving and investment in that country.

The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy under the Reserve Bank of India Act, 1934.

Monetary policy can be of two types-

  1. Expansionary monetary policy- is the policy that increases the money supply in the market. example- purchasing government securities from the open market, reducing CRR/SLR and encouraging borrowing by the banks.
  2. contractionary monetary policy- is the policy that decreases the money supply in the market. example- selling securities in the open market, raising CRR/SLR, and discouraging borrowing by banks.

Various tools used by RBI to determine monetary policy in India are following-

  1. Quantitative tools
  2. Cash Reserve Ratio (CRR)– A part of bank’s total deposit that is mandated by the RBI to be maintained with the RBI in the form of liquid cash.
  3. Statutory Liquidity Ratio (SLR)- reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, RBI approved securities.
  4. Repo Rate- the rate at which RBI lends to commercial banks against government securities.
  5. Reverse Repo Rate– the rate at which the RBI borrows money from commercial banks.
  6. Liquidity Adjustment Facility (LAF)– is a tool which allows banks to borrow money through repurchase agreements.
  7. Bank Rate– A bank rate is the interest rate at which RBI lends money to domestic banks, often in the form of very short-term loans.
  8. Marginal Standing Facility (MSF)- the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.
  9. Market Stabilisation Scheme (MSS)- launched in 20014, MSS is a monetary policy intervention by the RBI to withdraw excess liquidity by selling government securities.
  10. Open Market Operation (OMO)- purchase or sale of government securities by RBI.
  • Qualitative tools-
    • Margin requirements/ Loan to value ratio (LTV)
    • Consumer credit regulation
    • Selective credit control
    • Moral Suasion

Leave a Reply

Your email address will not be published.