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Effect on Economy Due to Change in Rbi Policy

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Effect on Economy Due to Change in Rbi Policy

Page 1 of 9
Shivans gupta
PGPFM
nifm- Faridabad
Shivans gupta
PGPFM
nifm- Faridabad
Effect of Monetary Policy of RBI on Economy
Effect of Monetary Policy of RBI on Economy
2012
2012

Effect of Change in monetary policy of RBI on Economy

Economy 
An economy consists of the economic systems of a country or other area; the labour, capital, and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area. A given economy is the result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.

Repo rate
Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation.

Reverse Repo rate 
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.

Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa. RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of October 2012, the CRR is 4.5 percent.

Statutory Liquidity Ratio...