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Monetary Policy
June 06 , 2012

Monetary Policy is a mechanism through which the Reserve Bank of India controls supply of money and the cost of money in the country. Since money comes in and rotates through banks, RBI controls the availability of money with them and also the cost of borrowing (from the banks for businesses and retail customers). RBI needs to step in and do this in order to balance inflation rate and growth rate of the economy. It does this using the Repo rate, Cash Reserve Ratio, Statutory Liquidity Ratio, etc.

An easy monetary policy is one where these rates are relatively low, in order to facilitate growth. A tight monetary policy is one where rates are high, in order to curtail inflation. Typically, these phases occur in cycles of a few years duration, as the growth goes through upturns and downturns.

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