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Which are the monetary policy instruments used by RBI?

Monetary policy is a policy of central bank of the country (for India, its RBI) whereby it aims to control the money supply in the country to manage inflation and promote growth. RBI uses various instruments to manage liquidity in the system with the objective to achieve the desired level of inflation and growth.

Which are the monetary policy instruments used by RBI?

Repo Rate – Repo rate or policy repo rate is a rate at which banks borrow funds from RBI against a collateral of approved government and other securities.

Reverse Repo Rate – Reserve repo rate is the rate at which banks can park their surplus liquidity with RBI against a collateral of approved government securities. 

Standing Deposit Facility (SDF) – SDF rate is the rate at which banks can park their surplus liquidity with RBI without the collateral of government securities.

Marginal Standing Facility (MSF) – MSF rate is the rate at which banks can borrow funds from RBI by dipping up to 2% into their Statutory Liquidity Ratio (SLR) securities. For eg. if the SLR is 18%, banks can use 2% of the SLR securities to borrow funds from RBI at MSF rate and maintain SLR at 16%. 

Liquidity Adjustment Facility (LAF) – LAF consists of repo, reverse repo, SDF and MSF.

Bank Rate – Bank rate is a rate at which RBI is ready to buy / rediscount bills of exchange or other commercial papers. 

Cash Reserve Ratio (CRR) – CRR is the percentage of its Net demand and time liabilities (NDTL) of second preceding fortnight, which the bank is required to maintain with RBI under section 42(1) of Reserve Bank of India Act, 1934.

Statutory Liquidity Ratio (SLR) – SLR is the percentage of its Net demand and time liabilities (NDTL) of second preceding fortnight, which the bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold under section 24 of Banking Regulation Act, 1949.

Open Market Operations (OMOs) – OMOs involve outright purchase and sale of government securities by RBI, to inject and absorb durable liquidity.

Market Stabilisation Scheme (MSS) – Under MSS, the surplus liquidity of a more enduring nature arising from large capital inflows, is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in separate government account with RBI.


References

Reserve Bank of India. (2018, January 15). 'Functions and Workings of RBI'. Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RWF15012018_FCD40172EE58946BAA647A765DC942BD5.PDF

Reserve Bank of India. (n.d.). 'Monetary Policy - Overview'. Retrieved from https://rbi.org.in/scripts/FS_Overview.aspx?fn=2752


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