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What is RBI Monetary Policy? Wiki, Definition & Significance

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What is RBI Monetary Policy? Wiki, Definition & Significance
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What is Monetary Policy? Monetary Policy Definition

Monetary Policy is the Macroeconomic Policy of the Monetary Authority of a country to control the supply of money. It involves the macroeconomic targets like Inflation rates or Interest Rates which ensures the price stability and brings general trust in the currency.

Macroeconomics: It is one of the 2 general fields in economics along with Microeconomics. Macroeconomics is a branch of economics which deals in performance, structure, behavior, and decision-making of an economy. It involves national income, money supply, inflation, unemployment rate, growth rate, interest rate and many more. In short these are the policies to meet the macro goals of economy of country.

Monetary Authority: Monetary Authority is the body which controls and deals with money supply of a particular currency of a country or a region. In general the Central Bank (Reserve Bank in India) is the Monetary authority of a country with certain degree of independence from the central government.

What is Monetary Policy of RBI?

Monetary Policy is the process by which Central banks or Monetary Authority (Reserve Bank of India) controls the money supply by controlling interest rates to maintain price stability and achieve high economic growth.

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RBI stated these objectives of the Monetary Policy of India:

  • Price Stability
  • Controlled Expansion Of Bank Credit
  • Promotion of Fixed Investment
  • Restriction of Inventories and stocks
  • To Promote Efficiency
  • Reducing the Rigidity

Key Indicators

As of 5 August 2016, the key indicators are

Indicator Current rate
Inflation 6.00%
Bank rate 7%
CRR 4.00%
SLR 21.00%
Repo rate 6.50%
Reverse repo rate 6%
Marginal Standing Facility rate 7.00%

Important terms of Monetary Policy of RBI

  • Repo Rate: It is the rate at which RBI Lends money to Commercial Banks in India. It is used to control Inflation.
  • Reserve Repo Rate: If RBI borrows money from Commercial Banks withing the country then the applied rate is called Reserve Repo Rate. If reserve repo rate increases, that means Commercial banks will get more incentives, and it will also decrease the supply of money in the market.
  • Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR ensures that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling the money supply in an economy.

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References:

This article was written after the thorough study of the topics from various trusted sources on the Internet. We have made every possible effort to make this article as easy to understand as it gets. If we have missed something in our honest effort please comment below to let us know, we will mention it with proper credits.

 

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