What are the instruments of monetary policy of the RBI?
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What are the instruments of monetary policy of the RBI?
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 The central bank's policy on the use of monetary tools within its authority to fulfil the Act's goals is referred to as monetary policy. The Reserve Bank of India (RBI) is charged for implementing monetary policy in India. The Reserve Bank of India Act, 1934, expressly mandates this obligation.

The instruments of monetary policy of the RBI are as follows:

1. Quantitative Measures 

● Varying Reserve Ratios:

○ Cash Reserve Ratio (CRR): It is a portion of a bank’s total deposits that the Reserve Bank of India requires to be kept with the latter as liquid cash reserves. 

○ Statutory Liquidity Ratio (SLS): It is essentially the reserve requirement that banks must maintain before extending credit to customers. It is essentially the reserve requirement that banks must maintain before extending credit to customers. 

● Bank Rate: The interest rate charged by a nation’s central bank to its domestic banks in order for them to borrow money is referred to as its bank rate. The interest rates charged by central banks are meant to stabilise the economy. 

● High Powered Money: It is the money created by the RBI and the government, in which the public holds the currency, and the banks hold the cash reserves. It differs from money for that money consists of demand deposits, whereas cash reserves serve as a foundation for creating demand deposits. 

2. Qualitative Measures

1. Open Market Operation: It refers to the central bank’s selling and purchase of securities on the open market to and from commercial banks or the general public. 2. Bank Rate Policy: It refers to the central bank’s manipulation of the discount rate in order to influence the economy’s credit condition.

  3. Sterilisation by RBI: The RBI’s market-based strategy in neutralising a portion or the whole monetary impact of foreign inflows is known as sterilising. 

4. Moral Suasion: The RBI uses this strategy to persuade commercial banks to assist in regulating the money supply in the economy.

The Reserve Bank of India (RBI) is a key player in the management of external shocks. Assume a foreigner decides to put money into Indian bonds. The foreign currency is then exchanged into Indian rupees by the bond seller at a commercial bank. The same commercial bank deposits money in the RBI, increasing assets and liabilities on the balance sheet; but, the overall reserves of the commercial bank remain unaltered.

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