One of the most important functions of central banks is formulation and execution of monetary policy. In the Indian context, the basic functions of the Reserve Bank of India as enunciated in the Preamble to the RBI Act, 1934 are: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” Thus, the Reserve Bank’s mandate for monetary policy flows from its monetary stability objective. Essentially, monetary policy deals with the use of various policy instruments for influencing the cost and availability of money in the economy.

Over time, the objectives of monetary policy in India have evolved to include maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for supporting economic growth, and achieving financial stability. Based on its assessment of macroeconomic and financial conditions, the Reserve Bank takes the call on the stance of monetary policy and monetary measures. Its monetary policy statements reflect the changing circumstances and priorities of the Reserve Bank and the thrust of policy measures for the future. Faced with multiple tasks and a complex mandate, the Reserve Bank emphasizes clear and structured communication for effective functioning of the monetary policy. Improving transparency in its decisions and actions is a constant endeavor at the Reserve Bank.

Qualitative instruments

Qualitative instruments are those instruments of credit control which focuses on the overall supply in the economy

  1. Bank rate– It refers to the rate of interest which the RBI lends money to the commercial banks. It relates with the immediate loan requirements of the commercial bank. There is a rise in bank rate when inflation needs to be corrected.
  2. Open market operations– It refer to the sale and purchase of securities in the open market by the RBI on behalf of the government. by selling the securities in the open market the RPI soaks liquidity from the economy. and by buying the securities the RBI releases liquidity. Inflation is corrected by sale of security.
  3. Repo Rate– The rate at which the RBI offers short term loans to the commercial bank by buying the government securities in the open market is called repo rate. There is a rise in Repo rate when inflation needs to be controlled.
  4. Reverse Rape Rate– The rate at which the RBI accepts deposits from the commercial banks is called Repo Rate. There is a fall in the reverse repo rate when inflation needs to be corrected.
  5. Cash Reserve Ratio– It refers to the minimum percentage if the bank’s deposits that the RBI requires the commercial banks to keep with the RBI. To control inflation CRR is increased.
  6. Statutory Liquidity Ratio (SLR)– every bank is required to maintain a fixed percentage of its assets in the form of liquid assets called SLR. the liquid assets include cash gold an unencumbered approved security. the rate of SLR is fixed by the RBI and is varied from time to time. To decrease the supply of money the central bank increases the SLR.

Qualitative Instruments

Qualitative instruments are those instruments of credit control which focus on select sectors of the economy.

  1. Marginal RequirementsThe margin requirement refers to the difference between the current value of the security offered for loan and value of loan granted. The margin requirement is raised when the supply of money needs to be reduced.
  2.  Rationing of creditRationing of credit refers to fixation of credit quarters for different business activities. Rationing of credit is introduced when the supply of credit is to be checked particularly for speculative activities in the economy
  3. Moral suasion- It is like rendering advice to commercial banks the by the RBI to follow its directives. the banks are advised to restrict loan during inflation and be liberal in lending during inflation.

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