As the regulatory authority, the Reserve bank monitors bank credit through directives altering Cash reserve ratio and Statutory liquidity ratio for banks, amending its own lending rate, known as Bank rate, stipulating minimum margin to be retained by banks in their advances, and also reviewing commodities governed by the Selective credit control. The reserve bank enunciates its monetary policy once a year, but announces a mild course review six months thereafter and quarterly reviews.

1. Objectives and efficacy of monitory policy of RBIAs an integral component of the overall economic policy of the country, the key objectives are:a. Regulation of monetary growth consistent with expected growth in output and a desirable rate of inflationb. Ensuring adequate expansion of credit for the purpose of meeting genuine credit requirements of productive sectors of the economy

2. Financial Liberalisation and Market Integration Financial liberalisation has made financial markets become progressively integrated. Market integration has also implies that the interest rate channel of monetary transmission mechanism has gained some strength in recent years.Another aspect of monetary policy is that if capital inflows outstrip the demand for foreign exchange, the appreciation of the domestic currency often necessitates interventions by the central bank to drain off the excess supply of foreign currency. This may result in an immediate expansion in primary money supply with attendant consequences for maintaining the price stability.The RBI sets indicative broad money (M-3) expansion in keeping with the expected growth rate in GDP and a tolerable level of inflation. The targets are publically announced through the monetary policy, i.e. RBI annual policy statement by the Governor.

3. Bank RateSection 49 of the RBI act, 1934, defines Bank rate as “the standard rate at which the bank is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under the Act”.The bank rate influences the cost of refinance and financial accommodation extended to commercial banks, specific groups, of institutions and the government.

4. Interest rate policySection 21 and 35A of the Banking Regulation Act, 1949 empowers RBI to regulate the interest rates of banks, both with regard to deposits and advances.

5. Selective credit controlThe RBI has also the power of correcting undue price fluctuations in respect of certain essential commodities such as food grains and agricultural raw materials arising from speculative activities. Provision of selective credit control in terms of sections 21 and 35A of the banking regulation Act, 1949 empower the Bank to implement selective credit control and eschew undue price fluctuation in sensitive/essential commodities. In adopting this control, RBI may give directions, generally or to any group of banks or to an individual bank on accommodation granted by them.The main instruments of the selective credit control are: a. minimum margin for lending b. ceiling on the level of credit against stocks of selected commodities to control the quantum of credit given

6. Annual Monetary and Credit Policythe function of formulating and conducting monetary and credit policy is of paramount importance

for any central bank. It is compliance with this main role of the RBI, announces Annual Monetary and Credit policy.