1) Monetary policy: meaning
Monetary policy is the central bank’s policy to manage:
- money supply and liquidity,
- interest rates,
- credit conditions, to achieve macro goals:
- price stability (inflation control),
- growth support (secondary),
- financial stability (in coordination).
In India, RBI conducts monetary policy.
2) Key RBI monetary policy instruments (high-yield)
2.1 Policy corridor: repo and reverse repo
- Repo rate: rate at which banks borrow short-term from RBI.
- Increase repo → borrowing cost rises → credit slows → inflation pressure eases (with lags).
- Reverse repo rate: rate at which banks park funds with RBI.
- Higher reverse repo encourages banks to park funds, tightening liquidity.
2.2 CRR (Cash Reserve Ratio)
% of bank deposits kept as cash reserves with RBI.
- Higher CRR → less lendable funds → tighter credit.
2.3 SLR (Statutory Liquidity Ratio)
% of deposits kept in liquid assets (often govt securities).
- Higher SLR → less lending capacity (conceptually).
2.4 Open Market Operations (OMO)
RBI buys/sells government securities:
- RBI buys securities → injects liquidity
- RBI sells securities → absorbs liquidity
2.5 Liquidity facilities (concept)
RBI uses liquidity adjustment mechanisms to manage short-term liquidity and align overnight rates.