Answer to Question #318102 in Finance for Naveen

Question

One of the important mandate of RBI is prudent management of monetary policy,

curbing inflation and checking unemployment in economy. Explain how RBI achieves

these diverse parameters by use of different tools available with it.

Answer 1

RBI achieves prudent management of monetary policy, curbing inflation and checking unemployment in economy through use of diverse tools such as:

Interest rate - the RBI's monetary policy department determines the policy interest rate (repo rate) required to achieve the inflation target.

Cash reserve ratio (CRR) - the RBI sets the average daily balance a bank should maintain with the reserve bank as a portion of its net demand and time liabilities.

Statutory liquidity ratio - this is a bank's share of net demand and time liabilities that it is required to maintain in safe and liquid assets for lending to private sector.

Marginal standing facility - under this facility, commercial banks can borrow additional money from RBI by using their SLR portfolio. RBI does this to avoid unanticipated liquidity shocks in money supply.

Open market operations - this encompasses outright purchase and sale of government securities to enhance durable liquidity in the money market.

Market stabilization scheme - it adds surplus liquidity from large capital inflow through sale of short-dated government securities and treasury bills.