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BankersAdda:MonetaryPolicyofIndia

MonetaryPolicyofIndia
Monetarypolicyistheprocessbywhichmonetaryauthorityofacountryi.e.
RBIcontrolsthesupplyofmoneyintheeconomybyitscontroloverinterest
ratesinordertomaintainpricestabilityandachievehigheconomicgrowth.In
India,thecentralmonetaryauthorityistheReserveBankofIndia(RBI)isso
designedastomaintainthepricestabilityintheeconomy.

MEASURESOFMONETARYPOLICY:
Quantitativemeasurestocontrolamountofcredit.
Qualitativemeasurestocontroltheallocationtodifferentsectionsof
economy.
TOOLSOFQUANTITATIVEMEASURES:

BANKRATE:Thebankratealsoknownasthediscountrate,is
therateofinterestchargedbytheRBIforprovidingfundsorloans
totheBankingsysteminindia.Italsosignalsthemediumterm
stanceofmonetarypolicy.
OPENMARKETOPERTIONS(OMO):Thebuyingandsellingof
governmentsecuritiesintheopenmarketinordertoexpandor
contracttheamountofmoneyinthebankingsystem.Purchases
injectmoneyintothebankingsystemandstimulategrowthwhile
salesofsecuritiesdotheopposite.
LIQUIDITYADJUCTMENTFACILITY(LAF):LiquidityAdjustment
FacilityistheprimaryinstrumentofReserveBankofIndiafor
modulatingliquidityandtransmittinginterestratesignalstothe
market.Underthescheme,repoauctions(forabsorptionof
liquidity)andreverserepoauctions(forinjectionofliquidity)are
conductedonadailybasis(exceptSaturdays).Itissameday
transactions,withinterestratesdecidedonacutoffbasisand
derivedfromauctionsonuniformpricebasis.
REPO/REVERSEREPORATE:TheseratesundertheLiquidity
AdjustmentFacility(LAF)determinethecorridorforshortterm
moneymarketinterestrates.Inturn,thisisexpectedtotrigger
movementinothersegmentsofthefinancialmarketandthereal
economy.
MARKETSTABLISATIONSCHEME(MSS):Thisinstrumentfor
monetarymanagementwasintroducedin2004.Liquidityofamore
enduringnaturearisingfromlargecapitalflowsisabsorbed
throughsaleofshortdatedgovernmentsecuritiesandtreasury
bills.Themobilisedcashisheldinaseparategovernment
accountwiththeReserveBank.

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BankersAdda:MonetaryPolicyofIndia

TOOLSOFQUALITATIVEMEASURES:
CREDITCEILING:InthisoperationRBIissuespriorinformation
ordirectionthatloanstothecommercialbankswillbegivenupto
acertainlimit.Inthiscasecommercialbankwillbetightin
advancingloanstothepublic.Theywillallocateloanstolimited
sectors.Fewexampleofceilingareagriculturesectoradvances,
prioritysectorlending.
MORALSUASION:MoralSuasionsaresuggestionandguidelines
bytheRBItothecommercialbankstotakesoandsoactionand
measuresinsoandsotrendoftheeconomy.RBImayrequest
commercialbanksnottogiveloansforunproductivepurpose
whichdoesnotaddtoeconomicgrowthbutincreasesinflationin
theeconomy.
CREDITAUTHORIZATIONSCHEME:CreditAuthorization
SchemewasintroducedinNovember,1965whenPC
BhattacharyawasthechairmanofRBI.Underthisinstrumentof
creditregulationRBIaspertheguidelineauthorizesthebanksto
advanceloanstodesiredsectors

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