Monetary Policies of RBI

What is Monetary Policy?

The policy by which the desired level of money flow and its demand is regulated by the RBI is known as monetary policy. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).
The main objectives of Monetary Policy are,
  • To maintain price stability. 
  • To ensure adequate flow of credit to productive sectors so as to assist growth.
  • Arrangement of full employment
  • Expansion of credit facility
  • Equality & Justice Stability in exchange rate
  • Promotion of Fixed Deposit
  • Equitable distribution of Credit

RBI use the following tools to regulate the monetary policy. They are,

  • Open Market Operations
  • Liquid Adjustment Facility
  • Bank Rate
  • Cash Reserve Ratio
  • Statutory Liquidity Ratio
  • Repo Rate
  • Reverse Repo Rate
What are Open Market Operations (OMOs)?

Open market operation is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks. OMOs are an effective quantitative policy tool in the armoury of the RBI, but are constrained by the stock of government securities available with it at a point in time.

What is meant by Liquid Adjustment Facility?

Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF operations help the RBI effectively transmit
interest rate signals to the market.

What is meant by Bank Rate?

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 on its long-term lendings. The clients who borrow through this route are the GoI, State governments, Banks, Financial Institutions, Co-operative Banks, NBFCs, etc. 

Increase in Bank Rate increases the cost of borrowing by commercial banks which results into the reduction in credit volume to the banks and hence declines the supply of money.

What is meant by Cash Reserve Ratio? 

The cash reserve ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in cash form. 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.

What is meant by SLR?
The statutory liquidity ratio (SLR) is the ratio (fixed by the RBI) of the total deposits of a bank which is to be maintained by the bank with itself in non-cash form prescribed by the Government to be up to 40 per cent. SLR rate is determined and maintained by RBI in order to control the expansion of the bank credit.
SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.
What is Repo Rate?
The rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate in India. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
It has direct impact on the nominal interest rates of the bank’s lending. The repo rate was introduced in December 1992.
What is Reverse Repo Rate?
It is the rate of interest the RBI pays to its clients who offer short term loan to it. It was started in November 1996 as part of Liquidity Adjustment Facility (LAF) by the RBI. 
The increase in Repo Rate and Reverse Repo Rate by the RBI is a symbol of tightening of the policy.
What is Marginal Standing Facility?
Marginal Standing Facility is a scheme announced by the RBI in its Monetary Policy, 2011-12 which came into effect from 9th May 2011. Under this scheme, banks can borrow overnight upto 1 per cent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 per cent (100 basis points) higher than the current repo rate.
Current Reserve Rates as of April 04. 2016
Bank rate 7.00%
CRR 4.00%
SLR 21.25%
Repo rate 6.50%
Reverse repo rate 6.00%
Marginal Standing facility rate 7.00%