Tuesday, 17 April 2012


Monetary Policy :

      Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.
      The Goal : achieving specific economic objectives, such as low and stable inflation and promoting growth.

The main objectives of monetary policy in India are :
1. Maintaining price stability
2. Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth.
3. Financial Stability

Direct Instruments :

1. Cash Reserve Ratio(CRR) : The share of net demand and time liabilities that banks must maintain as cash with Reserve Bnk. The Present CRR is 4.75%.

2. Statutory Liquidity Ratio(SLR) :  The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold. The present SLR is 24.0%.

3. Refinance facilities : Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect Instruments :

1. Liquidity Adjustment Facility(LAF) : Consists of daily infusion or absorption of liquidity on a repurchase basis, through Repo (Liquidity Injection) and Reverse Repo(Liquidity Absorption) auction operations, using government securities as collateral.

2. Open Market Operations : Outright sales/purchases of govt securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

3. Market Stabilization Scheme : The instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated govt securities and treasury bills. The mobilised cash is held in a seperate govt account with the Reserve bank.

4. Repo/Reverse Repo Rate : These rates under LAF determine the corridor for short-term money market interest rates. 
      Repo Rate is the rate of interest at which RBI lends to banks against sale of Government securities. The present Rpo Rate is 8.00%.
      Reverse Rpo is the rate which RBI borrows from the banks for short period of time. The present Reverse Repo rate is 7.00%.

5. Bank Rate : Bank rate is the rate of interest charged by RBI for re-discounting the bills of commercial banks or as a lender of last resort. The present Bank rate is 9.00%.

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