Tag: commercial studies

Interest refers to payment against the loan which we borrow from other people. It is the regular charge which a borrower pay to the lender for holding a sum of money of the lender. So, interest is the excess money which is paid by the borrower for holding a specified sum of money. Therefore, interest is the extra money paid on borrowed money. 

True.

Quantitative measures of monetary policy includes those instruments which focus on the overall supply of the money. It influences the total volume of credit in the economy. It includes: 

A. Two Policy Rates: 

Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the  money supply in the economy and vice versa. 

B. Two Policy Ratio:

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks.  It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must  keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

C. Open Market Operations: 

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity. 

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. By raising the margin requirement, the borrowing capacity of the borrower reduces as with the same amount of loan borrowed, the value of the loan decreases due to high margin requirement. 

Open market operation (OMO) is a monetary policy by the central bank in which the bank through government deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By selling the securities and bonds, the government soaks liquidity from the economy which controls the inflation in the economy by decreasing the purchasing power of the people and by buying the securities and bonds, the government releases liquidity which controls deflation in the economy by increasing the purchasing power of the people.