MPC Instruments

MPC Instruments

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As part of their monetary policies, the RBI employs some of the following instruments.

1. Operational Open Market - An open market activity is an instrument which includes purchasing/selling of protections like government security from or to people in general and banks. In order to control credit flow, the RBI purchases government securities and sells government securities.

2. CRR or, the Cash Reserve Ratio - The RBI requires banks to maintain a certain amount of reserves or balances in the form of deposits in the form of the Cash Reserve Ratio. The higher the CRR with the RBI, the lower will be the liquidity in the framework as well as the other way around. In 2002, the CRR decreased from 15% in 1990 to 5%. The CRR stands at 4% as of December 31, 2019.

3. Ratio of Statutory Liquidity (SLR) - All monetary establishments need to keep a specific amount of fluid resources with themselves anytime of their all out time and request liabilities. The Statutory Liquidity Ratio is the term for this. Precious metals, bonds, and other non-cash assets are used to store the assets. SLR is 18.25 percent as of December 2019.

4. Policy on Bank Rates - The interest that the RBI charges for lending money to the banking system is referred to as the "bank rate," and it is also referred to as the "discount rate." The cost of borrowing by commercial banks goes up when bank rates go up, which reduces the volume of bank credit and reduces the supply of money. The indicator of the tightening of the RBI's monetary policy is an increase in the bank rate. The bank rate is 5.40% as of December 31, 2019.

5. Cap on Credit - With this instrument, the RBI informs the commercial bank in advance that loans will be granted up to a certain limit. A commercial bank will be cautious when making loans to the general public in this scenario. They will give loans to specific industries. A couple of instances of credit roof are farming area advances and need area loaning.