Monetary Policy tools are instruments used by central banks (like RBI) to regulate money supply, interest rates, and overall economic stability. These tools are broadly classified into Quantitative and Qualitative instruments.
Tools of Monetary Policy:
1) Open Market Operations (OMO) → (A)
• Involves buying/selling government securities in the open market to regulate liquidity.
• OMO purchases → Inject liquidity
• OMO sales → Absorb liquidity
2) Statutory Liquidity Ratio (SLR) → (B)
• Banks must maintain a fixed percentage of their net demand and time liabilities (NDTL) in the form of liquid assets (e.g., gold, government bonds).
• Used to control inflation and credit growth.
3) Market Stabilization Scheme (MSS) → (C)
• Introduced in 2004 to absorb excess liquidity through the issuance of government securities.
• Used especially when large foreign capital inflows affect money supply.
4) Cash Reserve Ratio (CRR) → (D)
• The percentage of total bank deposits that must be kept with RBI as reserves.
• Higher CRR → Less liquidity → Controls inflation.
• Lower CRR → More liquidity → Boosts growth.
Study Notes
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