What are the instruments of monetary policy of RBI? How does RBI stabilise money supply against exogenous shocks?
What are the instruments of monetary policy of RBI? How does RBI stabilise money supply against exogenous shocks?
Following are the instructions of the monetary policy of RBI:
(i) Quantitive Instrument: It affects the overall supply of money and credit in the economy. These instruments are:
(a) Bank rate: The rate at which RBI gives credit to commercial banks. A low or high banks rate encourages banks to keep small proportion of their deposits as reserve which in result either reduce the flow of credit or increase the flow of credit.
(b) Open Market Operations: It refers to the sale or purchase of securities by RBI in the open market.
(c) Reserve Ratios: Ratios like CRR (Credit Reserve Ratio), SLR(Statutory Liquid Ratio) are playing an important role as the quantitative instrument.
(ii) Qualitative Instrument: These instruments direct or restrict the flow of credit to the specified areas of economic activity. These instruments are:
(a) Margin Requirements: It refers to the difference between the current value of the security offered for loans and value of loans granted.
(b) Rationing of Credit: It refers to the fixation of quotas for different business activities.
(c) Moral Suasion: It implies informal suggestion by the RBI to commercial banks to co-operate withe the general monetary policy.
Sometimes because of the inflow of foreign currency into the market. RBI plays an important role in controlling external shock. Suppose foreigner decides to make an investment in Indian bonds. The seller of the bond exchanges the foreign currency into rupees from a commercial bank.
The commercial bank deposits the currency in RBI which increases the assets and liabilities in the balance sheet, on the other hand, commercial bank's total reserves unchanged. In order to overcome from this situation, RBI sells the securities in the open market or sterilises the economy against adverse external shocks. This process is known as sterilisation.
In this way, RBI stabilises the money supply against exogenous shocks.
Following are the instructions of the monetary policy of RBI:
(i) Quantitive Instrument: It affects the overall supply of money and credit in the economy. These instruments are:
(a) Bank rate: The rate at which RBI gives credit to commercial banks. A low or high banks rate encourages banks to keep small proportion of their deposits as reserve which in result either reduce the flow of credit or increase the flow of credit.
(b) Open Market Operations: It refers to the sale or purchase of securities by RBI in the open market.
(c) Reserve Ratios: Ratios like CRR (Credit Reserve Ratio), SLR(Statutory Liquid Ratio) are playing an important role as the quantitative instrument.
(ii) Qualitative Instrument: These instruments direct or restrict the flow of credit to the specified areas of economic activity. These instruments are:
(a) Margin Requirements: It refers to the difference between the current value of the security offered for loans and value of loans granted.
(b) Rationing of Credit: It refers to the fixation of quotas for different business activities.
(c) Moral Suasion: It implies informal suggestion by the RBI to commercial banks to co-operate withe the general monetary policy.
Sometimes because of the inflow of foreign currency into the market. RBI plays an important role in controlling external shock. Suppose foreigner decides to make an investment in Indian bonds. The seller of the bond exchanges the foreign currency into rupees from a commercial bank.
The commercial bank deposits the currency in RBI which increases the assets and liabilities in the balance sheet, on the other hand, commercial bank's total reserves unchanged. In order to overcome from this situation, RBI sells the securities in the open market or sterilises the economy against adverse external shocks. This process is known as sterilisation.
In this way, RBI stabilises the money supply against exogenous shocks.
