Macroeconomics 12th I L25 I Credit Control I Repo I Reverse Repo I Bank Rate I CRR I SLR I OMO

In Lesson 25 of Class 12 Macroeconomics, we focus on Credit Control and Monetary Policy by the Reserve Bank of India (RBI), with an emphasis on quantitative instruments like the Repo Rate, Reverse Repo Rate, Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO). These instruments are essential for controlling the money supply, regulating credit, and stabilizing the economy. Quantitative Instruments of RBI’s Monetary Policy Repo Rate Definition: The Repo Rate is the rate at which the RBI lends short-term money to commercial banks against government securities. It is a tool used to manage liquidity and control inflation. Purpose: Increasing the Repo Rate makes borrowing from the RBI more expensive for banks, which can reduce money supply and control inflation. Lowering the Repo Rate makes borrowing cheaper, encouraging banks to lend more, thus stimulating economic activity. Current Rate: As of the latest update, the Repo Rate is around 6.50% (check the latest figures as this can change based on RBI’s periodic reviews). Reverse Repo Rate Definition: The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks. Banks earn interest at this rate when they deposit their excess funds with the RBI. Purpose: A higher Reverse Repo Rate encourages banks to deposit more funds with the RBI, reducing liquidity in the economy. A lower rate encourages banks to invest more in the market. Current Rate: The Reverse Repo Rate currently stands at 3.35%. Bank Rate Definition: The Bank Rate is the rate at which the RBI provides long-term loans to commercial banks, generally without requiring collateral. Purpose: This rate is primarily used to control overall credit. A higher Bank Rate can discourage borrowing by banks, thus reducing the money supply, while a lower rate can encourage borrowing. Current Rate: The current Bank Rate is approximately 6.75%. Cash Reserve Ratio (CRR) Definition: CRR is the percentage of a bank's total deposits that must be kept as reserves with the RBI in cash form. Purpose: By altering the CRR, the RBI can control the amount of funds available with banks for lending. A higher CRR restricts banks’ ability to lend, reducing liquidity, whereas a lower CRR increases the funds banks can lend. Current CRR: CRR is currently around 4.50%. Statutory Liquidity Ratio (SLR) Definition: SLR is the minimum percentage of a bank's net demand and time liabilities (NDTL) that must be maintained in the form of liquid assets like cash, gold, or government securities. Purpose: By increasing the SLR, the RBI can reduce the lending capacity of banks, tightening credit and reducing money supply. Lowering the SLR allows banks to lend more freely, increasing money supply. Current SLR: The SLR is around 18.00%. Open Market Operations (OMO) Definition: OMOs involve the buying and selling of government securities in the open market by the RBI. Purpose: Through OMOs, the RBI can regulate liquidity. Buying securities adds money to the banking system, increasing liquidity, while selling securities reduces liquidity. Current Practice: OMO rates vary based on market conditions. The RBI actively manages OMOs according to economic needs. Role of Quantitative Instruments in Monetary Policy The quantitative instruments form the backbone of RBI’s monetary policy, which aims to achieve the following: Control Inflation: By managing interest rates and liquidity, the RBI can control inflation. When inflation is high, the RBI may increase rates or reduce liquidity to make borrowing costlier and limit spending. Encourage Economic Growth: During periods of economic slowdown, the RBI may reduce rates to encourage borrowing and investment. Manage Exchange Rates: By regulating liquidity and interest rates, the RBI can influence the exchange rate to ensure currency stability. These instruments are periodically adjusted in the RBI’s Monetary Policy Committee (MPC) meetings, based on economic indicators and growth projections. Let me know if you'd like more detail on any specific instrument, or more about how these policies impact different sectors!