Which of the following is/are tools of Monetary policy?

1. Repo rate
2. Tax rate

Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above

Ans- a

Explanation- Monetary policy is the policy made by central bank of a country to control the flow of money in the economy. This is done by keeping control over interest rates in order to maintain price stability. Various modes of operations and instruments used are-

Open market operations involves buying and selling of government securities from or to the public or bank.

Cash Reserve Ratio – It is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances.

Statutory Liquidity ratio – Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc. Currently it is 21.5%

The bank rate– It is the rate of interest charged by the RBI for providing funds or loans to the banking system. Currently it is 7.75%

Moral Suasion – Request by the RBI to the commercial banks to take action and measures wrt any trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation.

Repo rate-It is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Currently it is 6.75%

Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. Currently it is 5.75%

Tax rate is the rate imposed by government to individuals and companies at the rate of which they have to pay taxes to them.