The Reserve Bank of India uses various monetary policy tools to regulate the availability, cost, and use of money and credit in the economy. Some of the key tools include open market operations, cash reserve ratio, statutory liquidity ratio, repo and reverse repo rates, bank rate, and liquidity adjustment facility. By adjusting these tools, the RBI can influence monetary conditions like liquidity, inflation, and economic growth. For example, decreasing the CRR injects more liquidity into the banking system, while increasing repo rates tightens monetary policy. The goal is to use these tools to achieve price stability while promoting economic development.

1. What is Monetary Policy?
Reserve Bank of India states that,
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.

2. Operations to regulate monetary
policy
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Open Market Operations
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Repo Rate and Reverse Repo Rate
Bank Rate
Liquidity Adjustment Facility (LAF)

3. Open market Operations
• An open market operation is
an instrument of monetary policy which
involves buying or selling of
government securities from or to the public
and banks. This mechanism influences the
reserve position of the banks, yield
on government securities and cost of bank
credit

4. CRR
• Cash Reserve Ratio is a certain percentage
of bank deposits which banks are required to
keep with RBI in the form of reserves or
balances .Higher the CRR with the RBI lower
will be the liquidity in the system and viceversa. As of today, the CRR is 4.00 percent.[3]

5. SLR
• Every financial institution has to maintain a
certain quantity of liquid assets with
themselves at any point of time of their total
time and demand liabilities. These assets can
be cash, precious metals, approved securities
like bonds etc. The current SLR is 23%.

6. Bank Rate
The bank rate, also known as the discount
rate, is the rate of interest charged by the RBI
for providing funds or loans to the banking
system. Increase in Bank Rate increases the
cost of borrowing by commercial banks which
results into the reduction in credit volume to
the banks and hence declines the supply of
money. As of today, the bank rate is 9.00%

7. REPO RATE AND REVERSE REPO RATE
• Repo rate is the rate at which RBI lends to
commercial banks generally against
government securities. Reverse Repo rate is
the rate at which RBI borrows money from the
commercial banks. This increase in Repo Rate
and Reverse Repo Rate is a symbol of
tightening of the policy. As of today, the repo
rate is 8.00 % and reverse repo rate is 7.00%.

8. 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.

10. Bank Rate
• The bank rate has been increased from 8.75% , October
2013 to 9.00%, current.
• This has lead to reduction in borrowings and increase in
interest rates charged by commercial banks.
• Due to increase in bank rate, the supply of money has come
down.
• The increase in the policy repo rate under the liquidity
adjustment facility (LAF) by 25 basis points from 7.25 per
cent to 7.5 per cent with immediate effect.
• The RBI in its annual monetary policy statement said there
would be modest improvement in the country's economic
growth to 5.7 per cent in the current fiscal, as against the
decade's low of 5 per cent in 2012-13.

11. • It has been decided to reduce the minimum daily
maintenance of the cash reserve ratio (CRR) from 99 % of
the requirement to 95 % effective from the fortnight
beginning September 21, 2013, while keeping the CRR
unchanged at 4.0 per cent.
• This reduction (in CRR from 5.5 per cent to 4.75 per cent)
injected around Rs 48,000crore of primary liquidity into
the banking system. (Rs 16000crores for every 25 basis
points cut in CRR)

12. • Reduce the marginal standing facility (MSF) rate by 75
basis points from 10.25 per cent to 9.5 per cent with
immediate effect;
• The RBI in its annual monetary policy statement said there
would be modest improvement in the country's economic
growth to 5.7 per cent in the current fiscal, as against the
decade's low of 5 per cent in 2012-13.

13. • The RBI says assessment of growth-inflation dynamics limits scope for further
easing of policy rate.
• FY14 GDP growth pegged at 5.7 per cent, down from government's estimates.
• CAD is the biggest risk to the economy.
• RBI proposes doubling of limits on priority sector lending to MSMEs to Rs 5 Crore.
• Sticking to its cautious stance, the Reserve Bank on Friday cut the key interest
rate by just 0.25 percent to 7.25 percent and kept the liquidity enhancing cash
reserve requirement unchanged, disappointing the industry and stock market.
The RBI in its annual monetary policy statement said there would be modest
improvement in the country's economic growth to 5.7 percent in the current
fiscal, as against the decade's low of 5 percent in 2012-13.

14. Change in CRR… why?
In the third quarter review of January 2012
CRR was reduced, to mitigate tight
liquidity conditions, by 50 basis points
leading to increase in liquidity by Rs.480
billion into the banking system.

15. How does monetary policy affect
inflation and other problems?

16. SELECTIVE/ QUALITATIVE
MEASURES
• The RBI directs commercial banks to meet their social
obligations through selective/ qualitative measures.
• These measures control the distribution and direction of
credit to various sectors of the economy.
 CEILING ON CREDIT
 MARGIN REQUIREMENTS
 DISCRIMINATORY RATES OF INTEREST

18. FACTORS AFFECTING MONETARY POLICY
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There exist a non-monetized sector
Excess of non-banking financial institutions (NBFI)
Existence of unorganized financial market
Money not appearing in an economy
Time lag affects success of monetary policy
Monetary policy and fiscal policy lacks coordination

19. Thank you…
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Robin Patni