Monetary policy is the policy of the central bank of a country to regulate money supply and credit in the country. 

Following are instruments of monetary policy : 

(i) Bank rate policy – Bank rate is the minimum rate at which commercial banks rediscount its eligible securities or borrow from the central bank. Bank rate is raised to discourage frequent borrowings and vice-versa. As the commercial banks are required to pay more for the financial accommodation, commercial banks can only be expected to lend at higher rates of interest. 

(ii) Open market operations – Open market operations consist of buying and selling government securities in the market by the central bank. When central bank sells government securities to commercial banks, these banks lose equivalent amount of cash reserves. This reduces the availability of credit. Similarly, if central bank purchases government securities from commercial banks, liquid position of commercial banks improves and availability of credit is more. 

(iii) Varying reserve requirements – Commercial banks are required to maintain reserves with the central bank on account of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Linder Cash Reserve Ratio, the banks are required to deposit with the central bank a percentage of their net demand and time liabilities. An increase in the CRR will lower the banks’ ability to give credit. SLR requires the banks to maintain a specified percentage of their net total demand and time liabilities in the form of liquid assets. If SLR is increased, the ability of banks to give credit reduces.