What are the 6 Tools of Monetary Policy?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

The 6 Monetary Policy tools are Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Repo Rate, Reverse Repo Rate, Open Market Operations, and Bank Rate (discount rate). Other important monetary policy tools include Fine Tuning Operations, the Main Liquidity Management Tool, the Liquidity Adjustment Facility (LAF), the Marginal Standing Facility (MSF) Rate, and the Standing Deposit Facility (SDF) Rate.

Monetary Policy Definition

A set of actions to maintain the price stability of a nation while keeping in mind the objective of growth is called monetary policy. This policy is adopted to control the money supply or the interest rate payable for very short-term borrowing. The objectives of the monetary policy are decreasing unemployment, targeting inflation levels, and currency exchange rates.

6 Tools of Monetary Policy

The six tools of Monetary Policy are as follows:

  • Statutory Liquidity Ratio (SLR): The minimum percentage of deposits that every commercial bank needs to keep to them in the form of liquid cash or other securities.
  • Cash Reserve Ratio (CRR): Every commercial bank must maintain some liquid cash amount. The liquid cash percentage of total securities is known as CRR.
  • Repo Rate – Repo rate is the rate at which commercial banks take loans from the Reserve bank of India.
  • Reverse Repo Rate: The Reserve bank of India takes loans from commercial banks to maintain liquidity in the market. The rate of interest RBI gives this bank is known as the Reverse repo rate.
  • Open Market Operations: The simultaneous purchase and sale of government securities and treasury bills by the Reserve Bank of India.
  • Bank Rate (Discount rate): When a commercial bank lends money from the National Bank, the rate of Interest is known as the Bank Rate.

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