Indian Economy: Monetary Policy & RBI

The Reserve Bank of India (RBI) is the central bank of the country, established on April 1, 1935, under the RBI Act, 1934. It manages the supply of money to ensure price stability.

Monetary Policy Committee (MPC)

• Structure: A 6-member committee (3 from RBI, 3 from the Government) chaired by the RBI Governor.
• Objective: To maintain inflation within the target band of 4% (+/- 2%).
• Repo Rate: The rate at which RBI lends money to commercial banks against government securities.

Key Tools and Reserves

• Cash Reserve Ratio (CRR): The percentage of total deposits that banks must keep with the RBI in cash form.
• Statutory Liquidity Ratio (SLR): The portion of deposits banks must maintain in liquid assets like gold or G-Secs.
• Open Market Operations (OMO): Buying and selling of government securities to regulate liquidity in the market.

Question for you: What happens to the money supply in the economy when the RBI increases the Cash Reserve Ratio (CRR)?

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