MONETARY POLICY TOOLS - INDIA
The government policy of India is divided into two policies, such as
1.
Fiscal policy which relates to
Taxes and Government spending, and
2.
Monetary policy which relates
to Interest rates and Money supply.
The major tools of Monetary policy in India
are as mentioned below :-
Bank Rate
The
Bank rate is the rate of interest which central bank (RBI in India) charges on the
un-secured loans and advances given to commercial banks.
Repo Rate
Repo
rate is the rate at which the central bank (RBI in India) lends short-term money
to commercial banks against by pledging Government securities in the case of
any short fall of funds.
Reverse Repo Rate
Reverse
Repo rate is a rate at which commercial banks keep their excess liquidity with
the Central bank.
If
commercial banks get more money from RBI, and will lend more money to people or
corporations with higher interest rates, then, it causes more demand in
economy. Thus, prices will be increased, and vice versa.
MSF Rate
MSF(Marginal
Standing Facility) rate is the rate at which the commercial banks can borrow additional
short-term funds from central bank by pledging Government securities at a rate
higher than Repo rate under “Liquidity Adjustment Facility – Repo scheme” (LAF
– Repo) in an emergency situation when interbank liquidity completely dries-up.
CRR
CRR
(cash reserve Ratio) is a minimum fraction or the average daily balance of the
total deposits of customers, which scheduled commercial banks need to hold as
reserves either in cash or as deposits with their specified current account
maintained with central bank of a country as a share of such % of its
Net demand and time liabilities (NDTL) that the central bank may notify
from time.
SLR
The
SLR (Statutory Liquidity Ratio) is a minimum required percentage at which the
commercial banks need to hold of their Net demand and Time liabilities (NDTL)
as safe and liquid assets in the form of Cash, Gold, and unencumbered approved government
securities before providing credit to their customers.
MCLR
MCLR
(Marginal Cost of Funds Based Lending Rate) is a minimum rate at which the
commercial banks should not lend funds (loans) to their customers below the
MCLR.
Open Market Operations (OMOs)
Open market operations is the sale and
purchase of government securities and treasury bills by central bank of the
country in its currency for injection (take out) and absorption (take in) of
durable liquidity to (or from) a commercial banks. The objective of OMO is to
regulate the money supply in the economy.
Follow the
links to know more about
impacts of increasing or decreasing the above discussed policy rates, Kinds of
Monetary policy, Analysis with diagrams, and other terminology relating to
Monetary policy.
Thank you,
Chandra Sekhar Reddy
Author and Sole proprietor,
SCR Gallery
Website : https://www.scrgallery.com
Blogger : https://scrgalleryindia.blogspot.com/
E-mail : scr@scrgallery.com
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