What is RBI's Monetary Policy:

Objectives & Instruments

The monetary policy refers to a regulatory policy

whereby the central bank maintains its control
over the supply of money to achieve the general
economic goals. Main instruments of the monetary
policy are: Cash Reserve Ratio, Statutory
Liquidity Ratio, Bank Rate, Repo Rate, Reverse
Repo Rate, and Open Market Operations.

Monetary policy refers to the credit control

measures adopted by the central bank of a country.
In case of Indian economy, RBI is the sole
monetary authority which decides the supply of
money in the economy.
The Chakravarty committee has emphasized that
price stability, growth, equity, social justice,
promoting and nurturing the new monetary and
financial institutions have been important
objectives of the monetary policy in India.
Objectives of the Monetary Policy of India

1. Price Stability: Price Stability implies

promoting economic development with
 considerable emphasis on price stability. The
centre of focus is to facilitate the environment
which is favourable to the architecture that
enables the developmental projects to run
swiftly while also maintaining reasonable
price stability.

2. Controlled Expansion Of Bank Credit: One

of the important functions of RBI is the
controlled expansion of bank credit and money
supply with special attention to seasonal
requirement for credit without affecting the
output.

3. Promotion of Fixed Investment: The aim

here is to increase the productivity of
investment by restraining non essential fixed
investment.

4. Restriction of Inventories: Overfilling of

stocks and products becoming outdated due to
excess of stock often results is sickness of the
unit. To avoid this problem the central
monetary authority carries out this essential
function of restricting the inventories. The
 main objective of this policy is to avoid over-
stocking and idle money in the organization.

5. Promotion of Exports and Food

Procurement Operations: Monetary policy
pays special attention in order to boost exports
and facilitate the trade. It is an independent
objective of monetary policy.

6. Desired Distribution of Credit: Monetary

authority has control over the decisions
regarding the allocation of credit to priority
sector and small borrowers. This policy
decides over the specified percentage of credit
that is to be allocated to priority sector and
small borrowers.

7. Equitable Distribution of Credit: The policy

of Reserve Bank aims equitable distribution to
all sectors of the economy and all social and
economic class of people.

8. To Promote Efficiency: It is another essential

aspect where the central banks pay a lot of
attention. It tries to increase the efficiency in
 the financial system and tries to incorporate
structural changes such as deregulating interest
rates, ease operational constraints in the credit
delivery system, to introduce new money
market instruments etc.

9. Reducing the Rigidity: RBI tries to bring

about the flexibilities in the operations which
provide a considerable autonomy. It
encourages more competitive environment and
diversification. It maintains its control over
financial system whenever and wherever
necessary to maintain the discipline and
prudence in operations of the financial system.

Instruments of Monetary Policy

The instruments of monetary policy are of two

types:

1. Quantitative, general or indirect (CRR, SLR,

Open Market Operations, Bank Rate, Repo
Rate, Reverse Repo Rate)

2. Qualitative, selective or direct (change in the

margin money, direct action, moral suasion)
These both methods affect the level of aggregate
demand through the supply of money, cost of
money and availability of credit. Of the two types
of instruments, the first category includes bank
rate variations, open market operations and
changing reserve requirements (cash reserve ratio,
statutory reserve ratio).
Policy instruments are meant to regulate the
overall level of credit in the economy through
commercial banks. The selective credit controls
aim at controlling specific types of credit. They
include changing margin requirements and
regulation of consumer credit.

The implementation of RBI's Quantitative and

Qualitative (Called as Monetary Policy)
instruments plays an important role in the
development of the country. If the required money
supply for the economy is not available in the
market, it leads to a decline in investment in the
economy. On the other hand, if the money supply
in the economy is more than what is required, then
the poor section of the economy will suffer
because the price of essential commodities will
rise.
In the Indian Economy, RBI is the sole authority
that decides the money supply in the economy.
And to control this, RBI implements the monetary
policy's Quantitative and Qualitative instruments
to achieve economic goals. The main instruments
of these policies are CRR, SLR, Bank Rate, Repo
Rate, Reverse Repo Rate, Open Market
Operations, etc.
Let's understand the Quantitative and Qualitative
instruments of RBI's monetary policy individually.
Quantitative Methods
The quantitative instruments are also known as
general tools used by the RBI (Reserve Bank of
India). As the name suggests, these instruments are
related to the quantity and volume of the money.
These instruments are designed to control the total
volume/money of the bank credit in the economy.
These instruments are indirect in their nature and
are used to influence the quantity of credit in the
economy.
Bank Rate Policy
The bank rate is the minimum rate at which the
central bank lends money and rediscounts first-
class bills of exchange and securities held by
commercial banks. When RBI gets a hint
that inflation is rising, it increases the bank interest
rates so that commercial banks borrow less money
and the inflation stays under control.
Commercial banks also increase their lending rate
to the public and business enterprises so that
people borrow less money, which will eventually
help to control inflation.
On the other hand, when RBI reduces bank rates,
that means borrowing for commercial banks will
become cheap and easier. This allows the
commercial banks to lend money to borrowers on
a lower lending rate, which will further encourage
borrowers and businessmen.
Legal Reserve Ratios
The commercial banks have to keep a certain
amount of reserve assets in the form of reserve
cash. Some portion of these cash reserves is their
total assets in the form of cash.
To maintain liquidity and to control credit in the
economy, the RBI also keeps a certain amount of
cash reserves. These reserve ratios are known
as SLR (Statutory Liquidity Ratio) and CRR
(Cash Reserve Ratio).
CRR refers to a certain percentage of commercial
bank's net demand and time liability that
commercial banks have to maintain with the RBI
at all times. In India, the CRR remains between 3-
15 per cent by the law.
SLR refers to a certain percentage of reserves to
be maintained in the form of gold and foreign
securities. In India, SLR remains 25-40% by the
law.
Any changes in SLR and CRR bring out the
change in the position of commercial banks.

Open Market Operations (OMO)

The sale and purchase of security in the long
run/short run by the RBI in the money market is
known as open market operations. This is a
popular instrument of the RBI's monetary policy.
To influence the term and structure of the interest
rate and to stabilize the market for government
securities, etc., the RBI uses OMO, and this
operation is also used to wipe out the shortage of
money in the money market.
If RBI sells securities in the money market, private
and commercial banks and even individuals buy it.
This leads to a reduction in the existing money
supply as money gets transferred from commercial
banks to the RBI. On the other hand, when RBI
buys securities from the commercial banks, the
commercial banks that sell receive the amount
they had invested in RBI before.
There are certain factors that affect OMOwhich
include underdeveloped securities market, excess
reserves with the commercial banks, indebtedness
of the commercial banks, etc.
Repo Rate
A Repo rate is a rate at which commercial banks
borrow money by selling their securities to the
RBI to maintain liquidity. Commercial banks sell
their securities in case of a shortage of funds or
due to some statutory measures. It is one of the
main instruments of the RBI to keep inflation
under control.
Reverse Repo Rate
Sometimes, the RBI borrows money from
commercial banks when there is excess liquidity in
the market. In that case, commercial banks get
benefits by receiving the interest on their holdings
with the RBI.
At the time of higher inflation in the country, RBI
increases the reverse repo rate that encourages
banks to park more funds with the RBI, which will
help it earn higher returns on excess funds.

Qualitative Methods
Qualitative instruments are also known as selective
instruments of the RBI's monetary policy. These
instruments are used for discriminating between
various uses of credit; for example, they can be
used for favouring export over import or essential
over non-essential credit supply. This method has
an influence on both borrowers and lenders.
Following are some selective tools of credit
control used by the RBI:
Rationing of Credit
RBI fixes a credit amount to be granted for
commercial banks. Credit is given by limiting the
amount available for each commercial bank. For
certain purposes, the upper credit limit can be
fixed, and banks have to stick to that limit. This
helps in lowering the bank's credit exposure to
unwanted sectors. This instrument also controls
the bill rediscounting.
Regulation of Consumer Credit
In this instrument, consumers' credit supply is
regulated through the instalment of sale and hire
purchase of consumer goods. Here, features like
instalment amount, down payment, loan duration,
etc., are all fixed in advance, which helps to check
the credit and inflation in the country.
Change in Marginal Requirement
Margin is referred to the certain proportion of the
loan amount that is not offered or financed by the
bank. Change in marginal can lead to change in the
loan size. This instrument is used to encourage the
credit supply for the necessary sectors and avoid it
for the unnecessary sectors. That can be done by
increasing the marginal of unnecessary sectors and
reducing the marginal of other needy sectors.
Suppose, RBI feels that more credit supply should
be allotted to the agricultural sector, then RBI will
reduce the margin, and even 80-90% of the loan
can be allotted.
Moral Suasion
Moral suasion refers to the suggestions to
commercial banks from the RBI that helps in
restraining credits in the inflationary period. RBI
implies pressure on the Indian banking system
without taking any strict action for compliance
with rules.
Through monetary policy, commercial banks get
informed of the expectations of RBI. The RBI can
issue directives, guidelines, suggestions for
commercial banks regarding reducing credit
supply for speculative purposes under the moral
suasion.

Final Thoughts
Monetary policy's quantitative and qualitative
methods aim to accelerate growth and stability by
controlling the credit supply in the economy. Both
the quantitative and qualitative instruments have
their own merits and demerits, but both of the
instruments are important for the economic
stability and price stability in the economy. Both
these methods are effective and efficient to control
inflation and deflation due to the movement of the
money supply in the economy.
Over the decades, it has been proven that the credit
supply in the economy can be controlled better
with the coordination of both the general
(Quantitative) and selective (Qualitative) methods
rather than implementing them individually in the
economy.

Conclusion:
So it can be conclude that the implementation of
the monetary policy plays a very prominent role in
the development of a country. It’s a kind of double
edge sword, if money is not available in the market
as the requirement of the economy, the investors
will suffer (investment will decline in the
economy) and on the other hand if the money is
supplied more than its requirement then the poor
section of the country will suffer because the
prices of essential commodities will start rising.