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Monetary policy in India is framed and regulated by the Reserve Bank of India (RBI), which acts as the central bank of the country. The main objectives of monetary policy are to maintain price stability, ensure adequate flow of credit to productive sectors, control inflation, encourage economic growth, and maintain stability in the external sector. Since India is a developing country, its monetary policy has to serve the twin objectives of growth and stability. For this, the RBI employs a number of quantitative and qualitative tools to regulate the supply of money and credit in the economy. Monetary policy tools in India are broadly classified into two categories: quantitative (general) instruments and qualitative (selective) instruments. Quantitative instruments regulate the overall supply of credit and liquidity in the economy, whereas qualitative instruments regulate the flow of credit to specific sectors or purposes. Quantitative (General) Instruments of Monetary Policy in India 1. Bank Rate Policy The bank rate is the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper. In simple terms, it is the rate at which the RBI lends money to commercial banks. When the RBI increases the bank rate, borrowing becomes costlier for commercial banks, which in turn raise their lending rates for customers. This leads to a reduction in borrowing, investment, and overall money supply. Conversely, a reduction in bank rate encourages borrowing and expands credit availability. Thus, the bank rate policy is a traditional tool of monetary regulation. 2. Repo Rate and Reverse Repo Rate Repo rate is the rate at which the RBI lends short-term funds to commercial banks against approved government securities. A hike in repo rate discourages borrowing by banks, reduces liquidity, and controls inflationary pressures. Conversely, a cut in repo rate encourages banks to borrow more from the RBI and enhances liquidity ______ _____ _________ ______ ________ ____.
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