"MONETARY POLICY"
INTRODUCTION:
Monetary
Policy is a macroeconomic policy laid down by the Central Bank. It refers to
the use of instruments under control of the Central Bank to regulate the
availability, cost and use of money and credit. It involves management of money
supply and interest rate and is the demand side economic policy used by the
Government of a country to achieve macroeconomic objectives like consumption,
growth, inflation and liquidity.
OBJECTIVES:
To achieve
specific economic objectives, such as low and stable inflation and promoting
growth. Main objectives are
- Financial Stability
- Maintaining price stability
- Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth.
Direct Investments:
1. Cash Reserve Ratio (CRR) - The share
of net demand and time liabilities that banks must maintain as cash balance
with the Reserve Bank.
2. Statutory Liquidity Ratio (SLR) - SLR
is a term used in the regulation of banking in India. It is the amount which
bank has to maintain in the form of cash, gold or approved securities, balance
in current account with other commercial bank.
Indirect Investments:
1. Liquidity Adjustment Facility (LAF) –
Consists of daily infusion or absorption of liquidity on a repurchase basis,
through Repo (Liquidity Injection) Reverse Repo (Liquidity Absorption) auction
operation, using government securities as collateral.
2. Repo/ Reverse Repo Rate- These rates
under LAF determine the corridor for short-term money market interest rates. In
turn, this is expected to trigger movement in other segments of the financial
market and real economy.
3. Open Market Operations (OMO) –
Outright sales/purchase of government securities, in addition to LAF, as a tool
to determined the level of liquidity over the medium term.
4. Market Stabilization Scheme (MSS) –
This instrument for monetary management was introduced in 2004. Liquidity of a
more enduring nation arising from large capital flows is absorbed through sale
of short-dated government securities and Treasury bill.
5. Bank Rate – It is the rate at which
the Reserve Bank is ready to buy or rediscount bills of exchange or other
commercial papers. It is also signals the medium-term stance of monetary
policy.
6. Base Rate- It is the minimum rate of
interest that a bank is allowed to charge from its customers. Unless mandated
by the government, RBI rule stipulates that no bank can offer loans at a new
lower than BR to any of its customers.
CAPITAL ADEQUACY RATIO (CRR) -
It is also called Capital to Risk (Weighted) Assets Ratio (CRAR),
is a ratio of a bank’s capital to its risk. CAR is defined as
CAR=
(Tier one capital+ Tier two capital) × 100
Risk Weighted Assets
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