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Banking-Monetary Policy Introduction, CRR, SLR, OMO - Economics, UPSC Mains Exam Video Lecture
FAQs on Banking-Monetary Policy Introduction, CRR, SLR, OMO - Economics, UPSC Mains Exam Video Lecture
| 1. What is monetary policy and why is it important in the banking sector? |  |
Ans. Monetary policy refers to the actions taken by a central bank to control the money supply and interest rates in an economy. It is important in the banking sector because it helps in maintaining price stability, controlling inflation, promoting economic growth, and ensuring financial stability. By adjusting key policy rates and implementing various tools like open market operations (OMO), cash reserve ratio (CRR), and statutory liquidity ratio (SLR), monetary policy influences the availability and cost of credit, which directly impacts the banking sector.
| 2. What is the Cash Reserve Ratio (CRR) and how does it affect banks? | |
Ans. The Cash Reserve Ratio (CRR) is the portion of a bank's total deposits that it has to maintain with the central bank in the form of cash reserves. It is a monetary policy tool used by the central bank to control the money supply in the economy. When the central bank increases the CRR, banks have to set aside a larger portion of their deposits as reserves, reducing the amount available for lending and investment. Conversely, when the CRR is decreased, banks have more funds to lend and invest, stimulating economic activity.
| 3. What is the Statutory Liquidity Ratio (SLR) and its significance for banks? | |
Ans. The Statutory Liquidity Ratio (SLR) is the percentage of a bank's total deposits that it has to maintain in the form of specified liquid assets such as government securities. It is a regulatory requirement imposed by the central bank to ensure the solvency and liquidity of banks. By enforcing the SLR, the central bank ensures that banks have a certain amount of safe and liquid assets to meet any unforeseen liquidity demands. SLR also helps in controlling inflation as it restricts the amount of funds available for lending by banks.
| 4. What are Open Market Operations (OMO) and how do they impact the banking system? | |
Ans. Open Market Operations (OMO) refer to the buying and selling of government securities by the central bank in the open market. It is a key tool used by the central bank to manage liquidity in the banking system and influence interest rates. When the central bank wants to increase liquidity, it purchases government securities from banks, injecting cash into the system. Conversely, when it wants to reduce liquidity, it sells government securities to banks, absorbing cash from the system. OMOs help in regulating short-term interest rates and influencing the overall lending and investment activities of banks.
| 5. How does monetary policy impact the overall economy and financial markets? | |
Ans. Monetary policy plays a crucial role in shaping the overall economy and financial markets. By influencing interest rates, money supply, and credit availability, it affects consumption, investment, and overall aggregate demand. When the central bank tightens monetary policy by increasing interest rates or implementing measures like higher CRR or SLR, it aims to control inflation and curb excessive borrowing and spending. On the other hand, when the central bank eases monetary policy by reducing interest rates or implementing measures like lower CRR or SLR, it aims to stimulate economic growth and encourage borrowing and investment. These policy actions impact the cost of borrowing, investment decisions, stock market performance, exchange rates, and overall economic activity.
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