Monetary Policy of India, the monetary policy committee was
setup by amending Reserve Bank of India Act, 1934 (RBI Act) was amended by the
Finance Act, 2016.It consists of six members, the three members from RBI and
other three were appointed by Central government.
Functions of Monetary Policy Committee
-To setup bench marking rates in the banks to control flow of
money and inflation.
-To control price stability by making necessary steps in
benchmark rates.
-To avoid overstocking and restriction of inventories and
stock.
Monetary Policy Committee Instruments
CRR means Cash Reserve Ratio, the ratio of amount to be deposited
by the banks in the RBI to control liquidity and inflation. Higher the
liquidity the lower the CRR,then higher CRR lower liquidity in the market.
SLR Means Statuary Liquidity Ratio, the ratio of amount of
money should be reserved in the form Bonds, Shares and assets.
Repo rate means the rate at RBI lends to its banks generally
against government securities. Reduction in Repo rate helps the commercial
banks to get money at a cheaper rate and increase in Repo rate discourages the
commercial banks to get money as the rate increases and becomes expensive.
Reverse Repo rate means the rate at RBI borrows money from
the commercial banks. The increase in the Reserve Repo rate will increase the
cost of borrowing and lending from the banks which will discourage the public
to borrow money and will encourage them to deposit. As the rates are high the
availability of money and demand decreases resulting to decrease in inflation.
Bank rate policy means discount rate at which RBI charges
interest rate givens loans to Banks.
The difference between Repo rate and Reverse repo rate is,
the repo rate at which banks borrow money from RBI at particular ratio to meet
the money crisis. The reserve repo rate at which RBI lends loans from banks at
particular ratio.
