Monetary policy and its Transmission

Objectives of RBI:

• to regulate the issue of Bank notes and 
• the keeping of reserves with a view to securing monetary stability in India and
• generally to operate the currency and credit system of the country to its advantage

MEASURES/TOOLS OF MONETARY POLICY

QUANTITATIVE MEASURES: Measures which aim to control the quantity of money supply directly such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO)
Cash Reserve Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy. Cash reserve ratio (CRR) is that slice of a bank's deposits, which the bank has to compulsorily deposit with RBI.
A CRR of six per cent means that out of every Rs 100, bank has to deposit Rs. 6 with RBI. Interestingly, RBI does not pay any interest on this money to banks. When RBI wants to reduce liquidity from the system, like in times of high inflation, it increases the CRR.
RBI by varying the CRR regulates the lendable funds of commercial banks.
An increase in CRR would also mean that money is being sucked out of the system. This would mean that funds are hard to come by and hence banks will have to pay more to depositors in order to induce them to keep their funds with banks. This will push up cost of funds for banks. The banks therefore will also have to raise lending rates in order to meet the increased cost while maintaining their margins. For example
RBI has increased the CRR of scheduled banks by 6% of their Net Demand and Time Liabilities (NDTL). As a result of this increase in the CRR, about 12,500 crore of excess liquidity will be absorbed from the system.