Economics · Ch 4 — Banking and Monetary Policy
Quantitative Tools of Monetary Policy
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Quantitative Tools of Monetary Policy
Quantitative (general) tools of monetary policy act on the total volume of credit in the economy, without distinguishing between its uses.
| Tool | Meaning | Effect of an INCREASE |
|---|---|---|
| Cash Reserve Ratio (CRR) | The minimum percentage of a bank's net demand and time liabilities that it must keep as cash reserve with the RBI | Reduces the funds banks have available to lend → contracts credit (this is exactly the LRR of Section 2's credit-multiplier formula) |
| Statutory Liquidity Ratio (SLR) | The minimum percentage of net demand and time liabilities that a bank must maintain in liquid assets (cash, gold, approved government securities) with itself | Reduces funds available for fresh lending → contracts credit |
| Repo Rate | The rate at which the RBI lends short-term funds to commercial banks against government securities | Makes borrowing from the RBI costlier for banks, which pass it on as higher lending rates → contracts credit |
| Reverse Repo Rate | The rate at which the RBI borrows funds from commercial banks | Makes it more attractive for banks to park funds with the RBI rather than lend → contracts credit |
| Bank Rate | The standard rate at which the RBI is willing to buy or rediscount eligible bills, used as a signalling rate | Signals costlier long-term credit → contracts credit |
| Open Market Operations (OMO) | Sale or purchase of government securities by the RBI in the open market | A sale of securities withdraws cash from the banking system → contracts credit; a purchase injects cash → expands credit |
Definition 1Cash Reserve Ratio (CRR)
The minimum percentage of a bank's deposits that it must keep as cash reserve with the RBI; the LRR of the credit …
Definition 2Statutory Liquidity Ratio (SLR)
The minimum percentage of a bank's deposits that it must hold with itself in liquid assets such as cash, gold, or approved …