Monetary Policy
Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the money supply, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
Further goals of a monetary policy are usually to contribute to the stability of gross domestic product, to achieve and maintain low unemployment, and to maintain predictable exchange rates with other currencies.
Monetary economics provides insight into how to craft an optimal monetary policy. In developed countries, monetary policy has generally been formed separately from fiscal policy, which refers to taxation, government spending, and associated borrowing.
Monetary policy is referred to as being either expansionary or contractionary. Expansionary policy occurs when a monetary authority uses its tools to stimulate the economy. An expansionary policy maintains short-term interest rates at a lower than usual rate or increases the total supply of money in the economy more rapidly than usual. It is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that less expensive credit will entice businesses into expanding. This increases aggregate demand(the overall demand for all goods and services in an economy), which boosts short-term growth as measured by gross domestic product(GDP) growth. Expansionary monetary policy usually diminishes the value of the currency relative to other currencies (the exchange rate).
The opposite of expansionary monetary policy is contractionary monetary policy, which maintains short-term interest rates higher than usual or which slows the rate of growth in the money supply or even shrinks it. This slows short-term economic growth and lessens inflation. Contractionary monetary policy can lead to increased unemployment and depressed borrowing and spending by consumers and businesses, which can eventually result in an economic recession if implemented too vigorously.
Repo Rate
Whenever banks want to borrow money they can borrow from the RBI. The rate at which RBI lends money to other banks is called the repo rate. If the repo rate is high that means the cost of borrowing is high, leading to slow growth in the economy. Markets don't like the RBI increasing the repo rates
Reverse repo rate
Reverse Repo rate is the rate at which RBI borrows money from banks. When banks lend money to RBI they are certain that RBI will not default, and hence they are happier to lend their money to RBI as opposed to a corporate. However, when banks choose to lend money to the RBI instead of the corporate entity, the supply of money in the banking system reduces. An increase in reverse repo rate is not great for the economy as it tightens the supply of money. But it can help quell inflation
Cash reserve ratio (CRR)
Every bank is mandatorily required to maintain funds with RBI. The amount that they maintain is dependent on the CRR. If CRR increases then more money is removed from the system, which is again not good for the economy
https://en.wikipedia.org/wiki/Monetary_policy
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