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As the regulatory authority, the Reserve bank monitors bank credit through

directives altering Cash reserve ratio and Statutory liquidity ratio for banks,
amending its own lending rate, known as Bank rate, stipulating minimum margin
to be retained by banks in their advances, and also reviewing commodities
governed by the Selective credit control. The reserve bank enunciates its
monetary policy once a year, but announces a mild course review six months
thereafter and quarterly reviews.
1. Objectives and efficacy of monitory policy of RBI
As an integral component of the overall economic policy of the country,
the key objectives are:
a. Regulation of monetary growth consistent with expected growth in
output and a desirable rate of inflation
b. Ensuring adequate expansion of credit for the purpose of meeting
genuine credit requirements of productive sectors of the economy
2. Financial Liberalisation and Market Integration
Financial liberalisation has made financial markets become progressively
integrated. Market integration has also implies that the interest rate channel of
monetary transmission mechanism has gained some strength in recent years.
Another aspect of monetary policy is that if capital inflows outstrip the demand
for foreign exchange, the appreciation of the domestic currency often
necessitates interventions by the central bank to drain off the excess supply of
foreign currency. This may result in an immediate expansion in primary money
supply with attendant consequences for maintaining the price stability.
The RBI sets indicative broad money (M-3) expansion in keeping with the
expected growth rate in GDP and a tolerable level of inflation. The targets are
publically announced through the monetary policy, i.e. RBI annual policy
statement by the Governor.
3. Bank Rate
Section 49 of the RBI act, 1934, defines Bank rate as the standard rate at which
the bank is prepared to buy or rediscount bills of exchange or other commercial
papers eligible for purchase under the Act.
The bank rate influences the cost of refinance and financial accommodation
extended to commercial banks, specific groups, of institutions and the
4. Interest rate policy
Section 21 and 35A of the Banking Regulation Act, 1949 empowers RBI to
regulate the interest rates of banks, both with regard to deposits and advances.
5. Selective credit control
The RBI has also the power of correcting undue price fluctuations in respect of
certain essential commodities such as food grains and agricultural raw materials
arising from speculative activities. Provision of selective credit control in terms of
sections 21 and 35A of the banking regulation Act, 1949 empower the Bank to
implement selective credit control and eschew undue price fluctuation in
sensitive/essential commodities. In adopting this control, RBI may give
directions, generally or to any group of banks or to an individual bank on
accommodation granted by them.
The main instruments of the selective credit control are: a. minimum margin for

lending b. ceiling on the level of credit against stocks of selected commodities to

control the quantum of credit given
6. Annual Monetary and Credit Policy
the function of formulating and conducting monetary and credit policy is of
paramount importance for any central bank. It is compliance with this main role
of the RBI, announces Annual Monetary and Credit policy.