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➢Inflation that arises due to the increase in demand and consequent shortage
of supply can be controlled by RBI
➢Monetary Policy: It is the process by which RBI manages money supply in the
market.It aims at inflation targeting and price stability
Monetary policy committee
➢ It is responsible for fixing the benchmark interest rates in India
➢ It comprises of six members - three officials of RBI and three external members
➢Governor of RBI is the chairperson of the committee
➢It meets at least 4 times a year
➢ The committee was created in 2016 to bring transparency and accountability in fixing
India’s monetary policy
Quantitative Analysis
BANK RATE
◼It’s the interest rate that is charged by a country’s central bank on loans and
advances to control money supply in the economy and the banking sector.
◼This is done on a quarterly basis to control inflation and stabilize country’s
exchange rates.
REPO RATE
◼Whenever banks have shortage of funds they can borrow from central bank.
◼Repo rate is the rate at which our banks borrow currency from the central bank.
REVERSE REPO RATE
◼It’s the rate at which the central bank borrow money from the commercial banks
◼It is mostly done , when there is surplus liquidity in the market
MORAL SUASION
◼Moral suasion means persuasion and request.
◼RBI being the apex bank uses this method that is of persuading the commercial
banks to follow its directions or orders on the flow of credit.
CONSUMER CREDIT REGULATION
◼This refers to issuing rules regarding down payments and maximum maturities of
installment credit for purchase of goods.
◼If there is excess demand for certain consumer durables leading to their high prices,
central bank can reduce consumer credit and vice versa.
DIRECT ACTION
◼Under the banking regulation Act, the central bank has the authority to take strict
action against any of the commercial banks that refuses to obey the directions given
by RBI
◼RBI may refuse to rediscount their papers or may give excess credits or charge a
penal rate of interest over and above the Bank rate, for credit demanded beyond a
limit.