The monetary policies are the policies that are used for the regulatory supply. The reserve bank controls the supply of money for general economic goals. The main instrument of monetary policy is the cash reserve ratio, bank rate, reverse repo rate, repo rate, and open market operations. The monetary policy is the credit control policy offered by the Reserve Bank of India. The RBI decides the supply of money in the economy in India. Recently the chakra arty committed has decided the price, equity, promoting, nurturing, stability, and growth for the monetary policy in India.
What is the different instrument in the monetary policy?
1. The quantative instrument or indirect way(CRR, SLR, open market operation, bank rate, the repo rate, reverse repo rate)
2. Quantities, selective or direct (change in margin money, direct action, moral suasion)
Both of the above methods use for the aggregation of the demand for the supply of money, cost of money, and availability of credit. The two types of rate include the bank rate variation, open market operation, and changing reserve requirement (cash reserve ratio, statutory ratio)
The policy instrument is used to regulate the overall level of credit in the economy through a commercial bank. Selective credit is used to control a specific type of credit. They are used for the margin requirement and consumer credit.
1. Bank rate policy:-
The bank rate is the minimum rate at which the reserve bank at which it rediscounts the first-class bill of exchange and government securities held by the commercial bank. Whenever the reserve bank find that inflation is increasing continuously, it increases the bank rate by borrowing from the reserve bank of India and commercial bank. In response, the commercial bank increases the lending rate to the business community and borrower who then borrows from the commercial banks. There is a decrease in the credit and price check from further raising. In other ways, prices are depressed then the reserve bank lower the bank rate.
2. Open Market Operation:-
The open market is called the sale and purchase of securities in the money market of the country. When prices are raised the reserve bank sells the securities to control them. The reserve of commercial bank are reduced and they are not in a position to lend more in the business community and general public. Further, the investment is discouraged and the rise of the price is checked. Whenever the recession started the central bank buys the securities. The reserve of a commercial bank is raised to increase the business community and the general public. It then increases the rise in investment. Output, employment, income, and demand in the economy.
3. Reserve ratio:-
The method of CRR and SLR are the two main deposit ratio. It increases and reduces the idle cash balance of a commercial bank. Every bank is required to keep the balance of a certain percentage of its total balance with the reserve bank as balance. Whenever the prices are rising the reserve bank raises the reserve ratio. Banks are required to keep more with the reserve bank. Their reserve is reduced and they lend less. The output, employment are worst affected. In the opposite case when the reserve ratio has lowered the reserve of commercial bank are increased.
4. Change in margin money:-
The result of the borrower is given with fewer money loans against the specified securities. For instance, raising the margin requirement to 70 % means that the pledger of securities of the valuation of RS. 10000 will be given to 30 % of their value. In the case of recession, the RBI encourages the increasing and decreasing the margin requirement.
5. Moral suasion:-
Under these the RBI demands the commercial bank to come for the help of controlling the supply of money in the economy.
What is the objective of the monetary policy of India?
1. Price stability:-
Price stability is promoting economic development with a considerable effect on price stability. The center of focus is to stabilize the environment which is favorable to the architecture that enables the development of the project to run swiftly while maintains a reasonable price.
2. Controlled expansion of bank of credit:-
RBI has to control the credit expansion and seasonal credit demand.
3. Promotion of Fixed Investment:-
The aim of the RBI is to increase the non-essential fixed deposit investment.
4. Restriction of Inventories:-
Too many stock of the units will results in the reduction of price. It will difficult to solve the problem with lots of stock. To solve this problem the RBI carry out the inventories. The main objective of this policy is to avoid over-shocking and idle money in the organization.
The RBI is the main governing unit of management for monetary controls policy and tools. RBI uses different tools for monetary controls.