Introduction:

Monetary policy refers to the policy of managing the volume of money in supply in the country. The volume and direction of the bank credit has an important bearing on the level of economic activity. The excessive credit generally leads to inflation and contraction of credit lead to deflation thus the expansion and contraction of credit and currency will bring fluctuations in economic activities. lack of availability of cheap credit also wider economic development of the country, the central bank of a country has the responsibility of controlling the volume and direction of credit in the country. The Qualitative and Quantitative methods are effective.

In order to achieve the objective of growth with  stability the policy followed by the central bank to control the volume of money and credit with a view to attend certain economic objectives is called monitory policy.

RP Kent defines monitory policy as “the management of the expansion and contraction of volume of money in circulation for the explicit purpose of attaining specific objectives”.

The methods adopted by RBI are

• Quantitative methods
• Qualitative methods

Quantitative methods:

These are non-discriminating in character as they tend to expand or contract the flow of money in all the channels.

• Bank rate: bank rate is the rate of interest charged by the RBI for providing funds or loans to the banking system. This is also known as discount rate. Increase in bank rate is symbols of lightening of RBI monetary policy the reverse will happen when the bank rate is reduce to overcome depreciation in the economy. Injecting and absorbing the liquidity from bank system is called bank rate policy.
• Open market operations: it is an instrument of monetary policy which involves buying and selling of government securities in the open market. The RBI sells government securities to contact the flow of credit and buys Government security to increase credit flow. When the RBI purchase a security from the banks and the public it increases the volume of credit in circulation, while their sale by it. it decreases the volume of credit thus purchases expand the credit and sales contract it. In this way the RBI sells government security during inflation purchasing during deflations.
• Cash reserve ratio: it is a certain percentage of Bank deposit which commercial banks are required to keep with the RBI in the form of reserves or balance. An increase in the CRR with the RBI leads to a contraction of credit and vice versa, the RBI can very CRR between 3% to 15%.
• Statutory liquidity ratio: in addition to CRR the RBI direct to commercial banks have to maintain a certain percentage of the total demand and time deposit with themselves in the form of liquid assets. These assets can be cash, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liquidity is term as the SLR there was a reduction of SLR from 38.5% to 25% of Narsimha Ram committee.

also read: explain the Qualitative methods of credit control.