Give the Quantitative Instruments of Monetary Policy.
The instruments of Monetary Policy can be qualitative or quantitative in nature: Quantitative instruments influence the money volume and Credit supply in the system. These include variations in reserve ratio requirements, bank rate and Open Market Operations.
The Qualitative (Selective) instruments affect the direction of credit supply. These include margin requirements, moral suasion, credit ceiling and discriminatory rates of interests. The quantitative instruments of monetary policy have been explained below:
Variations in Reserve Ratio Requirements: The RBI mandates it for commercial bank to keep a certain percentage of deposits with the Central Bank. There include cash reserve and liquidity reserves. The minimum cash reserve ratio fixed by RBI is called Cash Reserve Ratio.
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The CRR affects the volume or the price of credit and money supply in the country. An increase (decrease) in Cash Reserve Ratio reduces (increases) money supply, credit supply and liquidity in the system. Liquid reserves are maintained by commercial banks in form of cash, securities, gold etc. The minimum liquidity reserve ratio fixed by RBI is called Statutory Liquidity Ratio (SLR).
Changes in Bank Rate: The rate of interest at which the central bank lends money to commercial banks is called bank rate or discount rate. A change in bank rate affects money and credit supply. If the bank rate is increased, borrowings by commercial becomes expensive, which in turn increases the lending rate. It is called hardening of interest rates and discourages retail borrowings.
Similarly, decrease in bank rate, reduces the cost of borrowing for commercial banks. This decreases lending rates and encourages public borrowing with eases credit supply in the market. In inflationary conditions RBI resorts to tightening of credit supply, while in deflationary conditions bank rate is decreased.
Open Market Operations (OMOs): Open market operations refers to buying and selling of government securities by RBI. The Central Bank sells securities to commercial banks and public. This increases money supply with RBI and at the Same time reduces deposits with commercial bank. This also reduces credit Creation capacity of commercial banks.