Monetary Policy Tools in India

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 2 (683 words) Published: September 5, 2013
Monetary Policy:
Refers to programs that try to increase or decrease the nation’s level of business by regulating the supply of money and credit. This policy tool has a goal of increasing or decreasing the level of business activity in an economy. Monetary policy is RBI’s primary responsibility. Below are the main monetary policy tools that RBI uses: A) Quantitative Credit Control Methods:

1) Repo and Reverse Repo:
-Repo or repurchase option is a means of short-term borrowing, wherein banks sell approved government securities to RBI and get funds in exchange. In other words, in a repo transaction, RBI repurchases government securities from banks, depending on the level of money supply it decides to maintain in the country's monetary system. - Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. -Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. -Current Repo Rate is 7.25% and Reverse Repo Rate is 6.25%.

2) Bank rate:
-Bank rate is the rate at which the Central bank lends money to the commercial banks for their liquidity requirements. -Bank rate is also called discount rate. In other words bank rate is the rate at which the central bank rediscounts eligible papers (like approved securities, bills of exchange, commercial papers etc) held by commercial banks. -Current Bank rate is 10.25%.

3) Open Market...
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