EDUCATIONWELL

 What is Monetary Policy 

Monetary policy is the procedure by which the monetary authority of a nation, normally the central bank or currency board, controls either the expense of short-term borrowing or the cash supply, focusing on inflation or the loan fee to guarantee value strength and general trust in the currency.

As a part of expansionary monetary policy, the subsequent monetary authority often lowers the interest rates for consumers through various measures that make money-saving relatively and promotes spending in the market.

The RBI is vested with this responsibility under the RBI Act, 1934.

Let us look at the main goal of monetary policy and the monetary policy instruments that the Reserve Bank of India uses to regulate the money supply to achieve the objectives of the economic plan.

• Marginal Standing Facility (MSF): It is the rate at which banks borrow overnight loans from RBI.

Main Goal of Monetary Policy of RBI  is to maintain price stability keeping in mind the objectives laid out in the economic plan. Price stability is extremely important for attaining sustainable growth. To maintain price stability, inflation must be kept in check. RBI uses various monetary policy instruments to ensure that inflation is controlled. Let us look briefly at the monetary policy instruments used by the RBI.

Instruments of monetary policy These instruments are used to control the money flow in the economy: Open market operations An open market operation is an instrument of monetary policy which involves buying or selling of government securities like government bonds from or to the public and banks.

This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit.

The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow.

Per the suggestion by the Narasimham Committee report, the CRR was reduced from 15% in 1990 to 5 percent in 2002.

As on 9th October 2020, the SLR stands at 18%.[4] Bank rate graph from 1991 to 2011 Bank rate policy[6] The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing funds or loans to the banking system.