Monetary Policy
Monetary Policy is the plan used by the Reserve Bank of India (RBI) to manage the money supply in the economy. The main goal of this policy is to keep prices stable, which we call inflation control, while also helping the economy grow. In simple terms, the RBI acts like a tap. If there is too much money in the market, prices go up (inflation). In this case, the RBI closes the tap slightly to reduce the money flow.
Concepts (3)
Repo Rate is the interest rate at which the RBI lends money to commercial banks for short periods. Banks provide government securities as collateral (security) for these loans.
Repo Rate is the interest rate at which the RBI lends money to commercial banks for short periods. Banks provide government securities as collateral (security) for these loans. If the RBI increases the Repo Rate, it becomes expensive for banks to get money. As a result, banks increase the interest rates they charge to customers. This reduces the amount of money people spend. For example, a high Repo Rate makes your monthly EMI for a home loan more expensive.
CRR is a specific percentage of a bank's total deposits that must be kept with the RBI in the form of liquid cash. Banks do not earn any interest on this money.
CRR is a specific percentage of a bank's total deposits that must be kept with the RBI in the form of liquid cash. Banks do not earn any interest on this money. If the RBI increases the CRR from 4% to 5%, banks have less money left to give as loans to the public. This tool is used to control 'liquidity' or the total cash available in the banking system. It is a powerful way to reduce inflation quickly.
MCLR is the minimum interest rate below which a bank cannot lend money. It was introduced by the RBI to make the process of setting interest rates transparent.
MCLR is the minimum interest rate below which a bank cannot lend money. It was introduced by the RBI to make the process of setting interest rates transparent. Before MCLR, banks were slow to reduce interest rates for customers even when the RBI reduced the Repo Rate. MCLR ensures that when the RBI changes its rates, the benefits reach the borrowers faster. This helps in making bank credit fair for both the bank and the customer.
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