Monetary Policy

Monetary policy is the process by which the monetary authority

of a country controls the supply of money. It is often targeting

an inflation rate or interest rate to ensure price stability and general

trust in the currency.

Bank Rate

Open Market Operation

Cash Reserve Ratio

Statutory Liquidity Ratio

Margin Requirement

Moral Suasion

Direct Action

Repo

Reverse Repo

Sterilization

TERMS ASSOCIATED WITH

MONETARY POLICY

Bank Rate

Open Market Operation

Reserve Ratio – CRR & SLR

It is the rate at which the Central Bank lends money to Commercial Banks when they need fund.

It refers to the purchase and sale of government securities in the open market.

CRR is the ratio of money held by the Public in Currency to the deposits held by them in banks and SLR is the ratio of cash reserves kept by the

commercial banks and the total deposits in the bank. During inflation CRR and SLR would increase to reduce credit availability. During

Deflation, CRR and SLR would decrease to increase bank's lending capacity.

Margin Requirement

Sterilization

It refers to the difference between the market value of securities and the amount that can be borrowed against the securities.

Moral Suasion

Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the

money supply.

Moral suasion is a persuasion tactic used by Monetary authority to influence and pressure, but not force, banks into adhering to policy.

Tactics used are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or

vague threats.

Direct Action

Repo rate

Reverse Repo

This method is adopted when some commercial banks do not co-operate with the central bank in controlling the credit. Thus, central bank takes direct action against the defaulter. The central bank may

take direct action in a number of ways.

Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is

used by monetary authorities to control inflation

Reverse repo rate is the rate at which the central bank of a country borrows money from commercial banks within the country.