Q.What are the instruments of monetary policy of R.B.I.?

How One Bank Controls the Money of a Whole Nation

The Reserve Bank of India cannot walk into every shop and set prices, yet it powerfully influences how much money circulates in the economy. It does this by controlling credit — the loans that commercial banks create. When banks lend freely, money supply expands; when lending tightens, it contracts. The RBI's toolkit for tuning this is called its instruments of monetary policy.

Credit Control = the regulation of the volume, cost and direction of credit created by commercial banks, undertaken by the central bank to manage money supply and price stability.

The tools fall into two families: quantitative (affecting the total volume of credit) and qualitative (affecting its direction).

Quantitative Instruments

1. Bank Rate

The bank rate is the rate at which the central bank lends to commercial banks for their long-term needs. Raise it → borrowing from the RBI becomes costlier → banks raise their own lending rates → loans fall → money supply contracts. Lower it to expand credit.

2. Repo Rate and Reverse Repo Rate

• Repo rate — the rate at which the RBI lends to banks for their short-term needs against government securities. A hike (e.g. a rise in the benchmark lending rate by 140 basis points) makes credit dearer, curbs borrowing, and helps fight inflation.
• Reverse repo rate — the rate at which the RBI borrows from banks, absorbing surplus liquidity.

3. Reserve Ratios (CRR and SLR)

Banks must keep a fraction of their deposits in reserve, so they cannot lend everything:

• CRR (Cash Reserve Ratio) — the fraction of deposits banks keep as cash with the RBI.
• SLR (Statutory Liquidity Ratio) — the fraction they keep with themselves in liquid assets (cash, gold, government securities).

Raising CRR or SLR leaves banks less to lend, contracting credit; lowering them expands it. Their power is magnified by the money multiplier:

4. Open Market Operations (OMO) …