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SPEEDY Railway Book (English)

Monetary Policy

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, credit and use of money. 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.

To achieve specific economic objectives, such as low and stable inflation and promoting growth. Main objectives are -
  1. Financial Stability
  2. Maintaining price stability
  3. Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth;

RBI‘s Governor Dr. Urjit R Patel announced 6th Bi-monthly Monetary Policy Statement for 2016-17 on 8th February, 2017.
The policy rates are –

Repo Rate
Reverse Repo Rate
Bank Rate
Cash Reverse Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Marginal Standing Facility (MSF)

Brief Description:
  • Repo Rate – Repo rate is the rate of interest at which RBI lends money to commercial banks in the event of any Short-term loans. This rate is used by RBI to control inflation.
  • Reverse Repo Rate – Reverse Repo Rate is exact opposite of Repo Rate. It is the rate of interest at which RBI borrows money from commercial bank within the country. It is the monetary policy indirect instrument which can be used to control the money supply in the country.
  • Bank Rate – Bank Rate is the rate at which the RBI is ready to buy or rediscount bills of exchange or other commercial papers. Bank Rate is also referred to as the discount rate.
  • Cash Reverse Ratio (CRR) – Cash Reverse Ratio is the ratio of bank’s cash reserve balances with RBI with reference to the bank’s net demand and time liabilities to ensure the liquidity and solvency of the scheduled banks. It is a specified minimum fraction of the total deposits of customers.
  • Statutory Liquidity Ratio (SLR) – Statutory Liquidity Ratio is term used in the regulation of banking in India. It is the amount a commercial bank needs to maintain in the form of cash or gold or government approved securities (Bonds), balance in currents account with other commercial bank.
  • Marginal Standing Facility (MSF) – Marginal Standing Facility is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. 
Another instrument of policy rates are –
  • Liquidity Adjustment Facility (LAF)
  • Open Market Operations (OMO)
  • Market Stabilization Scheme (MSS)
  • Base Rate (BR)

Capital Adequacy Ratio (CAR) – Capital Adequacy Ratio also called Capital to Risk Assets Ratio (CRAR). It defined as –
                                    Tier 1 Capital + Tier 2 Capital
                        CAR = -------------------------------------- × 100
                                    Risk Weighted Assets

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