Which of the following is/are Instruments of Monetary policy to control inflation. a) Cash Reserve Ratio (CRR) b) Reverse Repo Rate c) Bank Rate d) Marginal Standing Facility (MSF) e) Repo Rate f) Market Stabilisation Scheme (MSS)

Which of the following is/are Instruments of Monetary policy to control inflation. a) Cash Reserve Ratio (CRR) b) Reverse Repo Rate c) Bank Rate d) Marginal Standing Facility (MSF) e) Repo Rate f) Market Stabilisation Scheme (MSS) Correct Answer a, b, c, d, e and f

The correct answer is a, b, c, d, e, and f.

Key Points

• Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• Instruments of Monetary Policy :
  • Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
  • Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  • Liquidity Adjustment Facility (LAF) :
    • The LAF consists of overnight as well as term repo auctions. 
    • The aim of the term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
  • Marginal Standing Facility (MSF):
    • A facility under which scheduled commercial banks can borrow an additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.
    • This provides a safety valve against unanticipated liquidity shocks to the banking system.
  • Bank Rate :
    • It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers.
    • This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
  • Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percentage of its Net demand and time liabilities (NDTL).
  • Statutory Liquidity Ratio (SLR) :
    • The share of NDTL that a bank is required to maintain in safe and liquid assets, such as - government securities, cash, and gold.
    • Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
  • Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
  • Market Stabilisation Scheme (MSS) :
    • This instrument for monetary management was introduced in 2004.
    • Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills.
    • The cash so mobilized is held in a separate government account with the Reserve Bank.