Monetary Policy Instruments
The objective of monetary policy and the tools the RBI uses: the policy repo rate and the liquidity corridor (SDF and MSF), the bank rate, CRR and SLR, open market operations, and the role of the Monetary Policy Committee. Current numeric values are given only as a dated snapshot.
What you will be able to do
- State the objective of monetary policy under the flexible inflation-targeting framework.
- Explain the repo rate and how the SDF and MSF form the liquidity corridor.
- Distinguish quantitative tools (CRR, SLR, OMO) from the price tool (the policy rate).
- Describe the composition and decision rule of the Monetary Policy Committee.
What is inside this lesson
- 1The objective
- 2The policy repo rate and the liquidity corridor
- 3Current values - a dated snapshot
- 4CRR, SLR and the bank rate
- 5Open market operations and other tools
- 6The Monetary Policy Committee
- 7Common confusions
- 8Quick revision
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The objective
Since the 2016 amendment to the Reserve Bank of India Act, India follows flexible inflation targeting. The primary objective of monetary policy is stated as price stability while keeping in mind the objective of growth.
The inflation target is set by the Central Government in consultation with the RBI for a multi-year period, expressed as a central number with a tolerance band on either side. If inflation stays outside the band for a defined stretch, the RBI must report to the Government explaining why and what it will do. Treat the exact target number and band as periodically reviewed.
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