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Economic Policies- Monetary and Fiscal

In: Business and Management

Submitted By navyamukhi
Words 481
Pages 2
MONETARY POLICY

WHAT IS MONETARY POLICY?
 Policy to control the supply of money in the country  Targeting a rate of interest to attain objective of growth and stability of the economy.

TYPES OF MONETARY POLICIES
Expansionary
• Increases the total supply of the money in the economy • Used to combat unemployment in a recession by lowering interest rates

TYPES OF MONETARY POLICIES
Contractionary
• Decreases the total supply of the money in the economy • Used to combat inflation by raising interest rates

TOOLS OF MONETARY POLICY IN INDIA

Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Repo and Reverse Repo Rate

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 • RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time.

STATUTORY LIQUIDITY RATIO (SLR)
• SLR is the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.

REPO AND REVERSE REPO RATE
REPO RATE
• It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive.

REVERSE REPO RATE
• It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system.

PURPOSE OF REPO AND REVERSE REPO RATE
• Repo rate and reverse repo are an important tool used by the RBI to control the supply of money in the banking system • In case of high inflation, RBI increases the repo rate and thus the cost of borrowing funds become dear.

• By reducing the Repo rate RBI can reduce the cost of borrowing and there by the interest...

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