The Reserve Bank of India (RBI) uses various instruments of monetary policy to control the supply of money in the economy and maintain price stability. These include direct tools like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which require banks to hold certain percentages of deposits as cash reserves and government securities. Indirect tools include the repo rate and reverse repo rate, which are the interest rates at which the RBI lends to and borrows from commercial banks. By adjusting these rates, the RBI can increase or decrease the availability of funds in the economy in order to manage inflation and economic growth.

1. INSTRUMENTS OF
MONETARY CONTROL

2. MONETARY POLICY
Monetary policy is the process by which monetary authority of a
country, generally central bank controls the supply of money in the
economy by its control over interest rates in order to maintain price
stability and achieve high economic growth. In India, the central
monetary authority is the Reserve Bank of India (RBI). It is so designed
as to maintain the price stability in the economy.

3. Objectives of the monetary policy of India
• Price Stability
• Controlled Expansion Of Bank Credit
• Promotion of Fixed Investment
• Restriction of Inventories and stocks
• To Promote Efficiency
• Reducing the Rigidity

4. Instruments of Monetary policy
1. Direct regulation:
-Cash Reserve Ratio (CRR)
-Statutory Liquidity Ratio (SLR)
2. Indirect regulation:
-Repo rate
-Reverse repo rate

5. Cash Reserve Ratio (CRR): Commercial Banks are required to hold a certain
proportion of their deposits in the form of cash with RBI. CRR is the minimum
amount of cash that commercial banks have to keep with the RBI at any given
point in time. RBI uses CRR either to drain excess liquidity from the economy or
to release additional funds needed for the growth of the economy.
For example, if the RBI reduces the CRR from 5% to 4%, it means that
commercial banks will now have to keep a lesser proportion of their total deposits
with the RBI making more money available for business. Similarly, if RBI decides
to increase the CRR, the amount available with the banks goes down.

6. Statutory Liquidity Ratio (SLR): SLR is the amount that commercial banks
are required to maintain in the form of gold or government approved securities
before providing credit to the customers. SLR is stated in terms of a percentage
of total deposits available with a commercial bank and is determined and
maintained by the RBI in order to control the expansion of bank credit. For
example, currently, commercial banks have to keep gold or government
approved securities of a value equal to 23% of their total deposits.

7. Repo Rate: The rate at which the RBI is willing to lend to commercial banks is called Repo
Rate. Whenever commercial banks have any shortage of funds they can borrow from the
RBI, against securities. If the RBI increases the Repo Rate, it makes borrowing expensive
for commercial banks and vice versa. As a tool to control inflation, RBI increases the Repo
Rate, making it more expensive for the banks to borrow from the RBI with a view to restrict
the availability of money. The RBI will do the exact opposite in a deflationary environment
when it wants to encourage growth.
Reverse Repo Rate: The rate at which the RBI is willing to borrow from the commercial
banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that the
RBI is willing to offer lucrative interest rate to commercial banks to park their money with
the RBI. This results in a reduction in the amount of money available for the bank’s
customers as banks prefer to park their money with the RBI as it involves higher
safety. This naturally leads to a higher rate of interest which the banks will demand from
their customers for lending money to them.