Quantitative And Qualitative Measures of Monetary Policy

There Are Two Types of Instruments or Say Measures of Monetary Policy

1-Quantitative Measures

2-Quality Measure

Quantitative Measures

 Quantitative Measures Are General Measures That Influence the Overall Economy Measures That Have an Impact on The Economy in General They Are Not Bifurcated Based on Sectors or Segment in The Economy They Have a Common Impact in All the Sectors

Qualitative Measures

Qualitative Measures Are Those Measures Which Are Selected by RBI Based on The Impact of Credit for Development of Certain Sector or Segment of The Economy This Measures Have Unique Impact on The Certain Sector and Unlike Quantitative Measures Do Not Impact All Sector Present in The Economy

Quantitative Measures of Bank Are Discussed Below

Bank Rate

Bank Rate Is The Rate Of Interest Which Reserve Bank Of India Charges On The Loans And Advances That It Gives To The Commercial Bank For Long Term The Commercial Banks Have Shortage Of Funds And Due To This Reason They Borrow Money Which Has To Be Repaired Back With Interest Within The Stipulated Time Period If Is Increased Commercial Bank Will Boor Less Money As It Is Expensive Tomorrow Also They Will Offer Less Amount Of Loan That To At The Higher Rate Of Interest To Their Customer The Customer Will Then Not Be Willing To Take Loans Hence Demand Of Goods And Service Will Come Down And Inflation Will Be Controlled Thus Bank Correct X Is An Quantitative Measure To Control Inflation In India

Repo Rate and Reverse Repo Rate

RBI Has Stopped Using Bank Rate As An Instrument To Regulate Money Supply It Now Uses Repo Rate And Rivers Repo Rate When Banks Need Money They Approach RBI The Great At Which Banks Borrow Money From RBI By Selling The Surplus Government Securities To RBI Is Known As Repo Rate Into An Agreement With The RBI To Refreshers The Same Pledged Government Securities At A Future That At A Predetermined Price Repo Rate Is Short Form Of Re Purchase Rate Generally This Lawns Are For Short Duration Up To 2 Weeks This Means A Bank May Even Take A Loan For As Low As One Day Does We Can Say That The Bank Cell Government Securities To RBI In Order To Raise Money For A Very Short Term With A Condition To Re Purchase Them At Some Discount Such A Discounting Rate Is Re Purchase Repo Rate

Repo Rate as A Measure to Control Inflation

In Case Of Inflation In The Economy The RBI Increases Repo Rate Increasing Repo Rate Discourages Commercial Bank To Take Loans As They Would Have To Pay More Interest To The RBI Increase In Repo Rate Forces Commercial Bank To Increase Interest Rate Of The Loans It Provides To The Customer Then Borrow Less Money Due To Increase The Rate This Intern Reduces The Purchasing Power Of The People There By Reducing The Supply Of Money In The Economy Does Increase In Repo Rate Helps To Curve Inflation In The Economy

Reverse Repo Rate

Reverse Repo Rate Is A Short Term Borrowing Rate At Which RBI Borrows Money From Commercial Bank Here The RBI Sales Certain Government Securities To The Commercial Bank With An Agreement Of Purchasing Them Bank At A Discounted Rate At The End Of The Short Term Period RBI Boors Money From Commercial Bank In Two Condition When The Require Additional Fund When The Field There Is Too Much Money Floating In The Economy Reverse Repo Rate Leads To The Increase In The Incentive Or Interest That The Commercial Bank Receive From RBI Does The Commercial Bank Will Prefer Giving The Loan To RBI Instead Of People This Will In Turn Reduce The Supply Of Money In The Market In This Help In Controlling Inflation In The Economy It Is A Viceroy Versus Situation If The Rivers Repo Rate Is Reduced It Helps In Controlling The Deflation

Stabilization Under Emergency Situation

At Times There Might Occur Some Emergency of Acute Shortage of Cash with The Commercial Banks Under Such Situation There Is a Special Window for Banks Where RBI Provides Money to Commercial Banks Against Approved Government Securities This Rate Is Higher Than Repo Rate and Is Known as Marginal Standing Facility This Helps in Stabilizing the Inflation Under Emergency Situation

Cash Reserve Ratio

Under The RBI Act 1934 All Commercial Bank Have To Keep Certain Minimum Case Reserve With The RBI Case Reserve Ratio Is The Specified Percentage Of The Total Deposit Of Customer Of The Commercial Bank That The Bank Has To Maintain With The RBI Initially CRR Was Decided To Be At 5% Of Demand Deposit And Two Percentage Of Term Deposit Since 1962 CRR Is Variable From 3 Percentage To 15% Of The Total Deposit Of Individual Banks Reason Behind The Case Reserve Of Commercial Bank Is To Have Enough Liquidity In The Market The Increase Or Decrease In The Rate Of CRR Directly Effects Controlling Inflation And Deflation Respectively, Higher CRR Leads To More Reserve With RBI This Lessons The Total Deposit Of The Commercial Bank Which Forces Them To Provide Less Credit Or Loan To People Due To Less Credit In Economy People Have Less Supply Of Money Which In Turn Control The Inflation And Increases Economic Stability

Statutory Liquidity Ratio SLR

Estuary Liquidity Ratio Is The Percentage Of Total Deposit That The Commercial Bank Have To Minimum Maintain With RBI Inform Of Cash Gold And Government Approved Security If The SLR Is High Instead Of Banks Giving Loan And Advances To Customer It Will Buy Government Security This Government Securities Help RBI To Fulfil The Government Expenses A High SLR Reduces The Capacity Of Bank To Give Launched To Customer There By Reducing The Supply Of Credit Or Money In The Economy A Low SLR Increases The Capacity Of Bank To Give Loans Does Increasing Credit Creation In The Economy

Open Market Operation

When RBI Purchases Or Sell Government Securities Or Born In Open Market It Is Called Open Market Operation When RBI Purchase Government Bond From The Open Market The Money Supply In The Economy Increase 10 Controlling The Effects Of Depression In The Economy When RBI Cells Government Bond In The Open Market There Is A Decrease In Money Supply Which Controls The Inflation In The Economy

RBI Accounts Against Shock Arising from The Excessive Increase or Decrease in Amount of Foreign Exchange

Sterilization Is A Form Of Monetary Action In Which Egg Central Bank 6 To Limit The Effect Of Influence And Out Flows Of Money Supply In Economy When There Is An Excess Inflow Of Foreign Exchange In India Because Of Business Activities RBI Cells Government Bond In The Open Market Source To Balance The Amount Of Inflow Of Foreign Exchange And Voice Oversaw RBI Does Not Keep Its Balance Sheet And Change Going To Excessive For An Exchange Does It Sterilizers It’s Balance Sheet Against External Shocks

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