Explain different monetary policy instruments along with their effects on the Indian money market.

The central bank uses several�instruments�of�monetary policy, referred to as�monetary�variables. They regulate the credit availability and liquidity in a manner that controls inflation and at the same time stimulate the growth of the economy. A number of monetary policy instruments are available in India which are as follows:
Open market operations

• It is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks
• The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow
• Open market operation makes bank rate policy effective and maintains stability in government securities market

Cash Reserve Ratio

• Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances
• The higher the CRR with the RBI, the lower will be the liquidity in the system and vice versa
• It is currently 4 %

Statutory Liquidity Ratio

• It is defined as the ratio of the liquid assets to time and demand liabilities
• Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities
• These assets have to be kept in non-cash form such as G-secs precious metals, approved securities like bonds etc
• Current SLR is 19%

Repo Rate

• Repo rate is the rate at which RBI lends to its clients generally against government securities
• Reduction in repo rate helps the commercial banks to get money at a cheaper rate
• Increase in repo rate discourages the commercial banks to get money
• The Current Repo rate is 6%

Reverse Repo Rate

• Reverse repo rate is the rate at which RBI borrows money from the commercial banks
• This increase in repo rate and reverse repo rate is a symbol of tightening of the policy
• The Current Reverse Repo rate is 5.75%

The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates.

Topics: GS-III: Indian Economy Issues Relating to Planning