MONETARY POLICY
Planned Economic Development adopted by India required an active monetary policy. The two stated aims of this policy were:
• Boost economic development
• Control inflationary pressures
The RBI is the main agency for implementing the monetary policy. RBI has defined its monetary policy in terms of ‘adequate financing of economic growth and at the same time ensuring reasonable price stability’. The instruments which RBI employs to achieve a stable monetary policy include:

BANK RATE
• Rate at which the central bank lends to commercial banks. In other words, it is the rate at which RBI rediscounts the bill of exchange.
• It thus acts as a signal to the economy on the direction of the monetary policy. RBI uses changes in Bank Rate to regulate fluctuations in exchange rate and domestic inflation.
• Each bank is free to decide the Base Rate below which it will not lend to borrowers. Banks should declare the benchmark based on which such Base Rates are decided. One bank can have only one Base Rate.
• At present it is 6.75%.

CASH RESERVE RATIO (CRR)
• Every Commercial Bank is required to keep a certain percentage of its demand and time liabilities (deposits) with the RBI (either as cash or book balance).
• The RBI varies this ratio as and when it perceives the need to increase or decrease money supply. RBI is empowered to fix the CRR at a rate ranging between 3 per cent and 15 per cent.
• RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
• At present the CRR is 4%.

STATUTORY LIQUIDITY RATIO (SLR)
• Commercial Banks are also required to keep (in addition to CRR) a certain percentage of their net demand and time liabilities (NDTL) as liquid assets in the shape of cash, gold or approved securities.
• As most of the SLR money is kept in treasury bills, government had, in the past, been using SLR as a means to mobilize low cost resources. This abuse of SLR leads to distortion in the interest rate and credit supply.
• In order to overcome this, Narasimhan Committee recommended that SLR should be brought down to 25 per cent, which is the current rate since 1993-94.
• At present the SLR is 20.50%.

OPEN MARKET OPERATION
• This refers to the RBI buying and selling eligible securities to regulate money supply.
• Traditionally, RBI was not resorting to this method. However, after the large inflow of foreign funds since 1991, RBI has had to step in to sterilize the flow to avoid excess liquidity.

LIQUIDITY ADJUSTMENT FACILITY (LAF)
• Liquid Adjustment Facility is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations.

REPO RATE
• Repurchase Option (REPO) is the rate at which RBI lends to commercial banks. In other words, it is the rate at which our banks borrow rupees from RBI.
• Whenever, the banks have any shortage of funds they can borrow it from RBI. A reduction in the Repo Rate will help banks to get money at a cheaper rate.
• When the Repo Rate increases, borrowing from RBI becomes more expensive.
• At present the Repo Rate is 6.25%.

REVERSE REPO RATE
• The rate at which Reserve Bank of India (RBI) borrows money from banks and hence exact opposite of Repo Rate.
• RBI uses this tool when it feels there too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
• An increase in Reverse Repo Rate can cause the banks to transfer more funds to RBI due its attractive interest.
• RBI resorts to the Repo Route to fine tune the liquidity position, without resorting to major policy instruments such as changes in CRR and Bank Rate. However, markets are bound to react to frequent changes in the Repo Rates and this will be reflected in corresponding changes in the deposit and lending rates of commercial banks.
• At present the Reverse Repo Rate is 5.75%

PRIME LENDING RATE
• It is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers).
• The rate is almost always the same amongst major banks.
• Some banks use the name “Reference Rate” or “Base Lending Rate” to refer to their Prime Lending Rate.

MARGINAL STANDING FACILITY (MSF)
• Rates at which the Scheduled banks can borrow funds overnight from RBI against government securities.
• It is a short term borrowing scheme for scheduled commercial banks in case the banks are in severe cash shortage or acute shortage of liquidity.
• MSF has been introduced by RBI to reduce volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
• At present the MSF rate is 6.75%.

SPECIAL DRAWING RIGHTS (SDR)
• It is an artificial currency created by the IMF in 1969. SDRs are allocated to member countries and can be fully converted into international currencies so they serve as a supplement to the official foreign reserves of member countries.
• Its value is based on a basket of key international currencies (U.S. dollar, euro, yen and pound sterling).