Monetary Policy

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  • RBI commenced its operations in 1935 in accordance with the provision of RBI Act, 1934.
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Role of RBI

 

  • As banker to government, RBI performs merchant banking function and maintains account of central and state government.
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  • RBI role as banker’s bank is to help maintain liquidity in the system and acts as lender of the last resort for banks facing liquidity issues.
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  • RBI also maintains accounts of all scheduled banks.
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  • RBI’s role as supervisor of financial system is to set regulations for smooth functioning of banks and financial institutions including Non Banking Financial Companies (NBFC).
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  • RBI also needs to maintain public confidence in the financial system and protect depositor’s
    interest.
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  • One of the most important functions of RBI is money supply management which is done through monetary policy.
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  • Monetary Policy is a process by which RBI controls money supply in the economy and influences liquidity cost in the financial system.
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  • RBI uses different monetary policy tools at different times based on assessment of macroeconomic and financial developments in the economy.
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  • Chart below gives a snap shot on monetary policy.
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Monetary Policy Snap Shot

 

  • Prevalent macroeconomic or financial situation in the economy determines RBI’s direction of monetary policy.
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  • RBI either takes a contractionary (tighten money supply) or expansionary (loosen money supply) monetary policy measures.
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  • RBI takes a contractionary monetary policy measure by raising policy rates like CRR, Repo rate, MSF or conducts OMO sales thereby reducing money supply.
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  • RBI expands money supply by lowering the policy rates or by buying OMOs.
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