Q-4)
What is the primary objective of the monetary policy of the Reserve Bank of India (RBI)?
                      How does the RBI use monetary policy to control inflation in the economy?
                      What are the main tools of monetary policy used by the RBI?
The Reserve Bank of India (RBI) is the central bank of India and is responsible for formulating and implementing monetary policy in the country. The primary objective of RBI’s monetary policy is to maintain price stability while supporting economic growth. The main tools used by the RBI to achieve these objectives are as follows:
- Repo Rate: The repo rate is the rate at which the RBI lends money to commercial banks. The RBI uses this tool to increase or decrease the money supply in the economy. If the repo rate is increased, borrowing becomes more expensive for banks, which reduces the money supply in the economy, leading to lower inflation. Conversely, if the repo rate is decreased, borrowing becomes cheaper for banks, which increases the money supply in the economy, leading to higher inflation.
- Reverse Repo Rate: The reverse repo rate is the rate at which the RBI borrows money from commercial banks. The reverse repo rate is used to drain excess liquidity from the banking system. If the reverse repo rate is increased, commercial banks will park more funds with the RBI, reducing the money supply in the economy.
- Cash Reserve Ratio (CRR): The CRR is the percentage of deposits that commercial banks are required to keep with the RBI. The RBI uses this tool to regulate the liquidity in the banking system. If the CRR is increased, banks have to keep more money with the RBI, reducing the amount of money available for lending and decreasing the money supply in the economy. Conversely, if the CRR is decreased, banks have to keep less money with the RBI, increasing the amount of money available for lending and increasing the money supply in the economy.
- Statutory Liquidity Ratio (SLR): The SLR is the percentage of deposits that commercial banks are required to invest in government securities. The RBI uses this tool to maintain the liquidity of the banking system and to finance government borrowing. If the SLR is increased, banks have to invest more in government securities, reducing the amount of money available for lending and decreasing the money supply in the economy. Conversely, if the SLR is decreased, banks have to invest less in government securities, increasing the amount of money available for lending and increasing the money supply in the economy.
- Open Market Operations (OMO): Open market operations involve the buying and selling of government securities in the open market. The RBI uses this tool to regulate the liquidity in the banking system. If the RBI buys government securities, it injects liquidity into the system, increasing the money supply in the economy. Conversely, if the RBI sells government securities, it drains liquidity from the system, reducing the money supply in the economy.
- Marginal Standing Facility (MSF): The MSF is a facility provided by the RBI to commercial banks to borrow money overnight in case of emergency. The interest rate on MSF is higher than the repo rate. The MSF is used to regulate the overnight borrowing rate in the market.
- Moral Suasion: The RBI can also use moral suasion to persuade commercial banks to follow certain policies. For example, the RBI can encourage banks to lend less and invest more in government securities, which can help reduce the money supply in the economy.
In conclusion, the RBI uses a variety of tools to implement monetary policy and achieve its objectives of maintaining price stability and supporting economic growth. These tools are designed to regulate the liquidity in the banking system and influence the money supply in the economy. By using these tools judiciously, the RBI can ensure that the economy grows in a stable and sustainable manner.