|Policy Action||Meaning||Excess Demand||Deficient Demand|
|Bank Rate||The interest rate at which RBI lends money to commercial Banks||Increased||Decreased|
|Repo Rate||The interest rate at which RBI lends money to commercial Banks||Increased||Decreased|
|Rev Repo Rate||Interest rate at which commercial banks keep their money with RBI||Increased||Decreased|
|Open market Operations||Buying and Selling of securities by RBI to control the liquidity in the economy||Selling||Buying|
|CRR||% of deposits that commercial banks needs to keep with RBI||Increased||Decreased|
|SLR||% of deposits which commercial banks needs to keep with themselves in the form of liquid assets||Increased||Decreased|
|Margin Requirements||Minimum down payment which borrower needs to make as a % of total loan||Increased||Decreased|
|Moral Suasion||Advisory instructions by RBI to Commercial banks||Be strict while lending||Be Liberal while lending|
|Credit rationing||Prescribed credit limits for different sectors of the economy||Increased||Decreased/Withdrawn|
The key element in all the above policy actions is the focus on money supply in the economy. Example – Suppose RBI wants to control the excess demand in the economy then it will increase the Bank rate. The cost of funds for commercial banks will increase. They in turn will increase the lending rate for people. Higher interest rates will reduce the demand for credit. People will get less credit and hence will have less money. This will reduce the aggregate demand.
The other policy actions can similarly be interpreted with focus on increasing money supply if deficient demand to be controlled or focus on decreasing money supply if excess demand is to be controlled.