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FIN255 Foundations Of Financial Institutions And Markets

Foundations Of Financial Institutions And MarketsTU Board 2076

What is meant by monetary policy?

1

Answer

· Based on the official syllabus and past papers
Updated

Monetary policy refers to the actions undertaken by a country’s central bank, such as the Nepal Rastra Bank (NRB), to influence the money supply, interest rates, and credit conditions in the economy. Its primary goals are to achieve price stability, promote economic growth, and maintain financial stability.

Key tools of monetary policy include:

  • Open Market Operations (buying/selling government securities)
  • Bank Rate (Discount Rate) (interest rate at which NRB lends to commercial banks)
  • Cash Reserve Ratio (CRR) (percentage of deposits banks must hold as reserves)
  • Repo Rate (short-term borrowing rate for banks from NRB)
  • Reverse Repo Rate (rate at which NRB borrows from banks)

By adjusting these tools, the central bank controls liquidity in the economy, ensuring sustainable economic performance while mitigating inflationary or deflationary pressures.

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