Instruments of Monetary Policy:
1. Quantitative Measures: The measures which impact the entire economy in a general or common way Eire called quantitative measures or general measures.
- Bank Rate: The rate at which RBI lends to the commercial banks for long-term is called the bank rate.
- Repo Rate: The rate at which RBI lends to the commercial banks for short-term is called the repo rate.
- Reverse Repo Rate: The rate at which RBI borrows short-term funds from the commercial banks is csilled the reverse repo rate.
- Monetary stability under emergency: In an emergency situation like an acute cash shortage to maintain monetary stability, commercial banks borrow from the RBI at fixed rate of interest. This rate is higher than repo rate.
- Cash Reserve Ratio – CRR: A certain minimum cash which all commercial banks have to keep reserves with the RBI is called Cash Reserve Ratio. It fulfills the need of a comfortable amount of cash reserves with the banking system. It is used to control inflation.
- Statutory Liquidity Ratio – SLR: In addition of CRR, under the Banking Regulation Act 1949, all banks have to maintain 25 % of their total deposits in the form of cash, gold and unencumbered approved securities. This is known as statutory liquidity ratio.
- Open Market Operations – OMOs: Open > market operations refers to sale of or parchase of government securities / bonds by the RBI in the open market. Such operations are undertaken to regulate inflation and depression.
- Sterilization Policy: When there is excessive flow of foreign exchange, then to control this situation the RBI indulges in sale of government securities in open market equal to the amount of inflow of foreign exchange and maintains the balance of monetary system. This is known as sterilization policy.
2. Qualitative Measures: These measures have unique impact on some sectors and are not meant to impact all sectors similarly.
These measures are as follows:
- Security: Banks lend money against some security deposits like jewellery, car, home, land, etc. from the borrowers.
- Margin: An individual is given only a certain percentage as loan of the total value of assets offered as security. This percentage is called margin.
- Ceilling on credit: The RBI prescribes ceilings for credits for different purposes.
- Discriminatory interest rate: RBI suggests different rates of interest for different types of lending. This is called the policy of discriminatory interest rate.
