Monetary Policies of RBI
What is Monetary Policy?
- 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?
What is Repo Rate?
What is Reverse Repo Rate?
What is Marginal Standing Facility?
Current Reserve Rates as of April 04. 2016
|Reverse repo rate||6.00%|
|Marginal Standing facility rate||7.00%|