Quantitative Measures Used in Monetary Policy
Central banks use various tools and measures to implement their monetary policy objectives. Quantitative measures refer to the numerical or quantitative tools used by the central bank to influence the money supply and credit conditions in the economy. This article will provide an overview of some of the most commonly used quantitative measures by central banks.
Repo Rate
The repo rate is the rate at which the central bank lends money to commercial banks for short periods, usually overnight. When the repo rate is lowered, borrowing becomes cheaper, leading to an increase in the money supply. Conversely, when the repo rate is raised, borrowing becomes more expensive, leading to a decrease in the money supply.
Reverse Repo Rate
The reverse repo rate is the rate at which commercial banks can lend money to the central bank. When the reverse repo rate is lowered, it becomes less attractive for banks to hold onto their excess funds, leading to an increase in the money supply. When the reverse repo rate is raised, it becomes more attractive for banks to hold onto their excess funds, leading to a decrease in the money supply.
Liquidity Adjustment Facility
The liquidity adjustment facility (LAF) is a mechanism used by central banks to manage short-term liquidity in the banking system. It comprises two operations: the repo and reverse repo operations. The central bank conducts these operations to manage the liquidity in the system and influence the money supply.
Marginal Standing Facility
The marginal standing facility (MSF) is a facility offered by the central bank to commercial banks to borrow funds overnight against the collateral of government securities. The MSF rate is higher than the repo rate and is used to discourage banks from borrowing excessively.
Corridor
The corridor refers to the difference between the repo rate and the reverse repo rate. The central bank uses the corridor to influence the money market rates and maintain price stability.
Bank Rate
The bank rate is the rate at which the central bank lends long-term funds to commercial banks. It is higher than the repo rate and is used to discourage borrowing for long-term purposes.
Cash Reserve Ratio
The cash reserve ratio (CRR) is the percentage of deposits that banks must hold in reserve with the central bank. When the CRR is lowered, banks can lend out more money, leading to an increase in the money supply. Conversely, when the CRR is raised, banks must hold back more funds, leading to a decrease in the money supply.
Statutory Liquidity Ratio
The statutory liquidity ratio (SLR) is the percentage of deposits that banks must hold in the form of government securities. When the SLR is lowered, banks can lend out more money, leading to an increase in the money supply. Conversely, when the SLR is raised, banks must hold more funds in government securities, leading to a decrease in the money supply.
Open Market Operations
Open market operations (OMO) refer to the buying and selling of government securities by the central bank in the open market. When the central bank buys government securities, it injects liquidity into the banking system, leading to an increase in the money supply. Conversely, when the central bank sells government securities, it withdraws liquidity from the banking system, leading to a decrease in the money supply.
Market Stabilisation Scheme
The market stabilisation scheme (MSS) is a tool used by the central bank to absorb excess liquidity in the banking system. Under the MSS, the central bank issues government securities to the public to absorb excess liquidity in the system, leading to a decrease in the money supply.
