Question-2: Discuss various Quantitative tools available before RBI to decrease money supply in the market.
Answer: The RBI is the main authority responsible for controlling inflation in the country. The central bank performs its functions through instruments known as quantitative tools.
- Quantitative tools also known as the Reserve Bank of India’s general tools are instruments linked to the quantity and volume of money.
- These instruments are used to regulate the total amount of money and volume of bank credit in the economy.
Various quantitative tools
- Repo Rate
It is the rate at which the central Bank lends funds to Commercial Bank for a short duration. Increase in repo rate signals banks to increase their lending rate.
- Reverse Repo Rate
It is the rate at which central bank borrows money from commercial banks. The reverse repo rate is lower than repo rate to encourage banks to lend and not park funds.
Cash Reserve Ratio (CRR) is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank.
Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
- Open Market Operations
Process in which central Bank buys or sells short-term Treasuries and other securities in the open market in order to influence the money supply.
Thus, RBI makes use of quantitative tools to keep inflation at permissible levels in line with the Monetary Policy Framework Agreement.
Tags: GS 3 (Economy)
By: Prashant Tiwari