• The Reserve Bank Of India is our central bank.• Established in 1935.• RBI possesses special status in our country. It’s the authority to regulate and control the monetary system of our Country.
Monetary Policy• Definition of Monetary Policy Monetary policy is a part of economic policy in which central bank controls the cost and supply of money and credit by applying different techniques. It is also one of the main function of central bank.
Objectives of Monetary policy. To ensure the economic stability at full employment or potential level of output. To achieve price stability by controlling inflation and deflation. To promote and encourage economic growth in the economy.
Tools Of Monetary Policy1. General Controls.(Quantitative)2. Selective Controls.(Qualitative)
1) General controlsa. Bank rate policy.b. Open market operations.c. Changing cash reserve ratio.d. Statutory liquidity ratio.
a) Bank Rate Policy• Bank rate is the minimum rate at which the central bank of a country provides loan to the commercial bank of the country.• Bank rate is also called discount rate because bank provide finance to the commercial bank by rediscounting the bills of exchange.• When general bank raises the bank rate, the commercial bank raises their lending rates, it results in less borrowings and reduces money supply in the economy
b) Open Market Operation• It means the purchase and sale of securities by central bank of the country.• The sale of security by the central bank leads to contraction of credit and purchase there of to credit expansion.
c) Changing the Cash Reserve Ratio• The banks have to keep certain amount of cash reserves with the RBI as reserves –RBI Act 1935• CRR is a powerful weapon.• An increase in the CRR would reduce the available funds for bank credit and a reduction would have the opposite effect.
d) Statutory Liquidity Ratio• Every commercial bank is required to maintain not less than 25% of its total time and demand liabilities with RBI.• It must be in the form of cash, gold, unencumbered approved securities.• Effect of SLR & CRR is same.
2) Selective Credit Control• They are adopted to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities.• The Power given by -“Sec 22 of Banking Regulation Act 1949”.
Selective Controls includes-a) Issuing of directives.b) Regulation of margin requirements.c) Differential rate of interest.d) Restriction on clean advances.e) Credit authorization scheme.f) Moral suasion.g) Direct action.