How RBI Controls Monetary Policy or Inflation ??? ( Part 2)

In this Post ,I will explain How RBI controls Inflation ?

As we know that,Inflation come because of Either Demand increases or Supply Decreases(Infact,shortage of Supply).
So,If RBI is able to Reduce the Money in the Hands of Public,which means Reducing ability to Buy ,i.e Indirectly Reducing Demand.

Since Demand is Reduced,So Price fluctuation will be in limits.


So,How to Reduce Demand of Public?????

RBI can reduce Demand of Public by
Increasing REPO RATE
if RBI increases REPO rate,Then Banks will also increase Intrest Rates of LOANs,
So the Public will PostPone their Plans (buying CAR or HOME etc etc)
Also Banks will increase the Rates of Depositors,(Saving account interest Rate)
So,the Public will prefer to save their money for better Return.

But RBI is Tuning from SUPPLY SIDE of Monetary Policy,which is effecting PUBLIC DEMAND SIDE.


EVEN CRR does the similar Job??
At this point,Some may get the doubt,EVEN CRR does the similar Job
i.e If CRR is increased,then money with Banks are Reduced,So again effecting Supply ,which will eventually reduce DEMAND of PUBLIC.

But RBI most of the times,uses this Tool,when there is MORE LIQUIDITY in the BANKS ,

Didnt Understood this Line??Let me explain

LIQUDITY means banks have more money with them,
that means,they will give more loans to the Customers,which is not good for economy.

Why giving more loans,is not good for economy??
Because,Banks(mostly Private Banks) will give loans to the customers who are not fulfilling the sureties(generally assets) upto the mark,
And after some years,if that customer defaulted(unable to pay),then the Asset with the bank will come under NPA(Non Performing Asset).

NPAs are not counted in Economy.

So,The Banks have to Auction that asset,if the Customer is unable to pay the money.


So,In Short

Repo Rate/Reverse Repo rate are used to control Inflation
CRR is used to Control Liqudity in Banks.

Hope every body is understood.
 

How RBI Controls Monetary Policy or Inflation ??? ( Part 1)

This is the most Frequent question asked by Banks to the Bank POs.
Answer to this question gives the First impression to the interviewer.So every aspirant must know this Topic to be precise,without confusion.

Before to this Topic,you need to know some more terms,which will help to make your base strong.
They are,
Repo Rate
Reverse Repo Rate
Cash Reserve Ratio (CRR)
Statutory Liqudity Ratio (SRR) 


Repo Rate:
It it the Rate at which Central Bank (RBI) gives money to National Banks (example SBI,BOB,allahabad bank etc)

Reverse Repo Rate:
Rate at which RBI take money from Banks

Obviously, Repo Rate is always greater than Reverse Repo Rate.

Cash Reserve Ratio:
Nationalized Banks (SBI,Bank of Baroda,HDFC etc ) are required to deposits to RBI in the form cash.
This minimum ratio is known as CRR.

For example,If SBI has 100/- and CRR is 6% then SBI had to deposit 6/- with RBI and Only 94/- are available with Bank i.e Only 94/- are used by bank to give loans etc.(assuming SLR=0 in this example)



Statutory Liqudity Ratio:
It is the minimum amount the  bank must keep them in the form of GOLD,BONDS .



Hope you understand these Basic terminologies.
Since this Post became little longer,so I will explain remaining in my next post.

I prefer to make small post.