Maintaining the right balance of controlling inflation and growing the economy has always been an issue with the central banks. In the contemporary global economic context, various policies are open to central banks for maintaining this equilibrium. Below are some ways in which it can be done: MoneRead more
Maintaining the right balance of controlling inflation and growing the economy has always been an issue with the central banks. In the contemporary global economic context, various policies are open to central banks for maintaining this equilibrium. Below are some ways in which it can be done:
Monetary Policy Adjustments
This is referred to as Monetary Policy. It is a tool used by the central banks to affect economic activity. Lowering the rates will spur borrowing and investment which will in turn catapult growth, on the other hand increasing it helps in curbing inflation through lowering spending.
Targeted Lending Programs
Central banks can open up special lending windows to provide support for sectors that would be important for the recovery of the economy, such as small and medium enterprises or green energy projects.
By extending credit, which in turn makes sure banks have the liquidity to lend to businesses and the general public will boost economic activities.
Macroprudential Policies
These functions can be performed by the monetary policies or interventions in the market such as banks and other financial institutions. Those are the ones that give loans and advances and accept deposits, they have to carry out their duties with due care.
Exchange Rate Management
Foreign Exchange Market Interference: Application of the policy of manipulating the exchange rate can have a direct effect on inflationary and growth dimensions by influencing export competitiveness as well as import prices.
Quantitative Easing
This involves buying government securities or other financial assets to increase the money supply which in turn will motivate lending and investment, thus supporting growth.
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As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth. 1. Repo and Reverse Repo Rates: The RBRead more
As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth.
1. Repo and Reverse Repo Rates: The RBI also changes the repurchasing rate at which banks can borrow from the RBI and the redeeming rate at which the RBI can borrow from the banks. Variation of these rates is employed by the RBI to control credit creation in the economy leading to impacted money availability in the economy.
2. Cash Reserve Ratio (CRR): CRR is the proportion of the deposit, which banks are required to maintain with the RBI. CRR uplifting makes the credit available for lending to be scarce and therefore constrict money supply, while its trimming, has the reverse effect.
3. Statutory Liquidity Ratio (SLR): Net demand and time liabilities are also specified as a minimum percentage to be reserved on approved securities. SLR change influences the banking liquidity and ability to approve loans.
4. Open Market Operations (OMOs): To control the money supply, RBI also buys or offers government securities on the market. The sale of securities absorb funds from the market, on the other hand, purchase returns funds into the market.
5. Market Stabilization Scheme (MSS): This tool was introduced to remove excess in the money supply; whereby its work is done through issuing government securities available for absorption of extra money.
Collectively, these tools help make a certain that RBI runs a steady economy in relations to inflation, currency value and availably of credit.
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