Monetary Tools Of The Central Bank

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        Various monetary tools are used by the central bank to control the money supply in the economy. The main monetary control instruments of the Central Bank are CRR(Cash Reserve Ratio), SLR(Statutory Liquidity Ratio), Repo-rate and  Reverse repo-rate. With each of these instruments, the central bank can affect the supply and demand of money in the economy.

         Following is a discussion of each of these tools:

1. Cash Reserve Ratio(CRR):

          It is the legal rules issued by the central bank and implemented on the all bank. Example: In the bank, total deposit is 50% then the central bank required fixed deposit of 10%  in its own bank ( that is: Central Bank) and remaining 40% will remain in the bank itself (that is: commercial or government bank) which can be regulate in the authority of bank itself.

2. Statutory Liquidity Ratio(SLR):

         It is also the legal rules issued by the central bank. In this tools also, the central bank implement the certain rules which is slightly different from CRR. Example: If the bank have 50% total deposit then, 15% must be fix deposit in its own bank, it will not deposited in the central bank like in CRR. And, the bank itself haven't authority to use that money. Only remaining 25% ( 50% - 10% - 15%) amount regulates or transit in the authority of bank itself( that is: commercial or government bank). 

3. Repo- rate:

        In this method, commercial bank borrow loan from central bank during the liquidity cries for short term only( that is: 90 days). When central bank give loan to the commercial bank then, obviously it will  charge some interest. Those interest charged by the central bank to the commercial bank in terms of certain condition is called Repo-rate.

4. Reverse repo-rate:

          This method is somehow reverse to the repo-rate method. In this method, commercial bank deposit some of its amount to the central bank then, central bank fix some interest under certain terms and condition. Those interest rate is called reverse repo-rate. Reverse repo-rate help to control the inflation rate of the country. 

        When inflation rate of the country is increases, at that moment central bank announced to give more interest rate than to the normal people who gave interest while taking loan. Then, commercial bank deposit its money to the central bank rather than distributing loan to the public which helps to decrease the inflation rate of the country.  

        

    

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