What are the Instruments of Monetary Policy ?
The Central Bank of a country has the responsibility of maintaining economic stability by controlling the volume and direction of credit in the country. Bank credit is an important part of the money supply. Excessive credit can create the inflation in the economy while deficiency of credit supply may cause depression. Lack of cheap credit may also slow the economic development of a country.
At the times of depression, there is a need to expand credit while at a time of inflation there is a need to contract credit. To promote the economic development, expansion of credit at low rate of interest is desirable.
In order to maintain economic stability and to promote economic growth, central bank uses monetary policy according to the needs of the situation.
Mainly there are two types of instruments of monetary policy to control credit –
1. Quantitative or General Instruments –
These instruments seek to change the total supply of credit in general. These are –
(a) Changing the Bank Rate and Repo Rate
(b) Open Market Operations
(c) Changing the Cash Reserve Ratio
2. Qualitative or Selective Control Instruments –
These instruments seek to change the volume of a specific type of credit. In simple words, Selective control tools (instruments) affect the use of credit for particular purposes.