Last updated on October 16th, 2023 at 03:50 pm
Monetary Policy is the Norms and Policies set by Monetary Authority (Usually the Central Bank of the Country) to make a stable Economy. Thus the Monetary Policies are aimed at creating a Trustable and Valuable currency that will bring a stable growth to the economy.
Reserve Bank of India (RBI) the Central Bank and Monetary Authority of India through various tools like interest rates, Changing reserve Requirements and Varying the Money Supply.
Objectives of Monetary Policy
As explained above the Monetary Policies are set with the goal of create a safe and reliable economy with various tools.
But the Policies are based on the objective that remains same. The Three Objective of Monetary Policy are as below.
- Controlling Inflation
- Encouraging Growth
- Financial Stability
1. Controlling Inflation
The basic criteria for the good monetary policy is to keep the Inflation at bay. Thus by adjusting various interest rates RBI is controlling amount of money present in the economy, hence controlling the Inflation.
2. Encouraging Growth
The basic role of the Central bank is to ensure a stable and healthy growth in the economy. Thus it is imperative that the Price stability is attained, so that the growth is uniform and at level with the target.
Both a Heavy Growth in short time and the Lack of Growth will affect the economy severely. Thus to have a control over growth, RBI uses Open Market Operations to control the price of goods and keeping the demand for the product at the desired level.
3. Financial Stability
Economy of the Country is depends on the stable Financial Institutions like banks and their smooth functioning.
Failure of even a single financial institution apart from affecting the general public who are directly have a relationship with the institution also affects the Economy of the country as the scenario reflects that the economy is so week.
Thus with manipulating the Interest rates and Reserve Ratios RBI controls the financial institutions functions. This also make sure the banks ability to come across any short hurdles.
RBI Tools of Monetory Policy
RBI uses various Tools to contol the economy also called monetary Policies. The Tools are basically divided into two parts.
- Policy Rates
- Reserve Ratios.
1. Policy Rates
Policy Rates are interest rates fixed by RBI to control the money supply and also make sure of the availability of enough cash in the economy for smooth growth.
Repo Rate
The banks when short of fund can borrow money from RBI by selling Security on the promise that they will buy back the security by paying predetermined interest rate.
Thus by increasing the Repo Rate RBI makes the borrowing costly for banks.
Reverse Repo Rate
Banks can deposit excess unused cash to RBI, the interest provided by RBI on these deposits is called Reverse Repo Rate.
RBI uses this tool to drain out excess cash from economy.
Bank Rate
The rate at which RBI lends money to the banks is called Bank Rate. This type of lending is direct lending thus it does not involve collateral security like in the case of Repo Rate.
Reserve Ratios
Reserve Ratios are minimum amount of cash that should be maintained with the RBI by the banks. These ratios protect the banks from market moments.
There are two important rations used by RBI namely Cash Reserve Ratio (CRR) and Statutary Liquidity Ratio (SLR).
Cash Reserve Ratio (CRR)
All commercial Banks in India should maintain certain part of the public deposit with them in the Central Bank i.e., RBI.
RBI can fix the CRR between 3% to 15%. RBI uses CRR to increase or decrease the money supply.
Increasing the Reserve Requirements will result in reduction in the Money available in circulation.
Statutory Liquidity Ratio (SLR)
SLR is the amount of liquid assets such as Gold and other securities other than cash that has to be kept with the Central Bank.
Monetory Policy Rates
| Repo Rate | 6.5% |
| Reverse Repo Rate | 3.35% |
| Bank Rate | 6.75% |
| CRR | 4.5% |
| SLR | 18% |
Conclusion
Monetary Policies are even though is difficult to interpret is simple to understand. The basic objective of the policy is to create a strong economy where there is a stable growth on every sector of the economy.
RBI with the Monetary tools have done a great job over the years. And helped the economy comes through the inflation and Recession without affecting the people much.