Monetary Policy Instruments

Section 4: Monetary Policy Instruments

• Mandatory Tools (Q):

OMO (Open Market Operation): RBI creates supply of money ↔ Govt instruments (securities sold to get money) (Absorbing and injecting liquidity into the market).

Bank Rate: 6.5% → 10% (Long term - no collateral). Interest at which banks take money from RBI

CRR (Cash Reserve Ratio): (4.5%) A certain percentage of demand and time deposits must be kept with RBI (For controlling inflation and money supply)

SLR (Statutory Liquidity Ratio): Mandatory 18.5% of demand and time deposits kept with RBI as cash, gold, or govt security (Mandatory reserve requirement set by RBI, requiring commercial banks to maintain a minimum percentage of their demand and time deposits in safe, liquid assets like cash, gold and securities)

Acts a buffer for sudden demands

LAM (Liquidity Adjustment Measures): REPO & REVERSE REPO (short term, collateral required)

• Tool used in monetary policy that allows bank to borrow money from RBI.
• REPO is the interest rate at which the central bank lends money to commercial banks when there is shortage of money, for short term and with collateral
• Reverse REPO is the interest rate at which RBI borrows money from commercial banks, when is there is surplus of liquidity with the bank.

MSF: Marginal Standing Facility

MSS: Market Stability Scheme

• Target Inflation: 4% (w.e.f 2020) - 2026, ± 2%

• MPC (Monetary Policy Committee): RBI Governor, Deputy Governor, 3 nominees of GOI

• Bank Assets vs Liability:

Asset: Disbursements to people

Liability: Demand and Time deposits (SB accounts, current accounts, fixed deposits)