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Monetary Policy

The document discusses various monetary policy tools used by central banks to regulate money supply and inflation. It describes tools such as the bank rate, repo rate, reverse repo rate, open market operations, cash reserve ratio, statutory liquidity ratio, government securities, marginal standing facility, cheap/easy money policies, tight/dear money policies, and priority sector lending. The central bank uses these tools to influence lending rates, control liquidity, steer inflation, and direct credit to priority sectors of the economy.

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Rahul Poudell
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10 views

Monetary Policy

The document discusses various monetary policy tools used by central banks to regulate money supply and inflation. It describes tools such as the bank rate, repo rate, reverse repo rate, open market operations, cash reserve ratio, statutory liquidity ratio, government securities, marginal standing facility, cheap/easy money policies, tight/dear money policies, and priority sector lending. The central bank uses these tools to influence lending rates, control liquidity, steer inflation, and direct credit to priority sectors of the economy.

Uploaded by

Rahul Poudell
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Under the Guidance of IITians (M.S.

Sharma & Peeyush Kumar)


Monetary Policy Tools
Bank rate: It is the rate charged by the central bank for lending funds to commercial banks. Bank rates influence
lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks. In order to
curb liquidity, the central bank can resort to raising the bank rate and vice versa.

Repo rate: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to
commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control
inflation.

Reverse repo rate: It is the rate at which the central bank of a country (Reserve Bank of India in case of India)
borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to
control the money supply in the country.

Open market operations: It refers to the selling and purchasing of the treasury bills and government securities by
the central bank of a country in order to regulate money supply in the economy.

Cash Reserve Ratio (CRR): It is a specified minimum fraction of the total deposits of customers, which commercial
banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the
guidelines of the central bank of a country.

Statutory Liquidity Ratio (SLR): It is the minimum percentage of deposits that a commercial bank has to maintain in
the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to
keep before offering credit to customers.

Head Office: Ridhi-Sidhi, Gopalpura Bypass, Jaipur

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Under the Guidance of IITians (M.S. Sharma & Peeyush Kumar)

Government Securities (G-Sec): They are marketable instrument issued by the Central government or individual
states. It recognizes the government's financial obligations. G-Secs are government-issued debt instruments that
allow the government to borrow money.

Marginal Standing Facility (MSF): It is a provision made by the Reserve Bank of India through which scheduled
commercial banks can obtain liquidity overnight, if inter-bank liquidity completely dries up.

Cheap/ Easy money policy: It is a monetary policy that increases the money supply usually by lowering interest
rates. It occurs when a country's central bank decides to allow new cash flows into the banking system.

Tight / Dear money policy: It refers to a monetary policy by the central bank where the central bank sets high
interest rates so that credit is not easily available to the general public in order to decrease the rate of inflation in
the economy by curbing demand.

Priority Sector’s Lending: It is the role exercised by the RBI to banks, imploring them to dedicate funds for specific
sectors of the economy like agriculture and allied activities, education and housing and food for the poorer
population.

Head Office: Ridhi-Sidhi, Gopalpura Bypass, Jaipur

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Under the Guidance of IITians (M.S. Sharma & Peeyush Kumar)

Head Office: Ridhi-Sidhi, Gopalpura Bypass, Jaipur

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