Monetary Policy is the process by which the monetary authority of a country controls the supply of money often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. It is made by the RBI through various tools like Repo,reverse repo, bank rate, SLR etc.
Suppose there is too much inflation (price rise) in the market because people have more cash in hand and only few products in the market.
Read Also: Important information on RBI
So RBI changes those numbers in a way that banks have less money to give loans to people. Obviously, the banks will charge higher interest rates on their loans, this is called tightening of the monetary policy / dear money policy.
The Reverse of it is Cheap money policy i.e. when RBI feels that people should get loans at the cheap rate so that there is a boost in demand.
By repo reverse repo….it bans the inflation n side by side prevents from market failure.it controls the action of RBI ,hence, it decreases or increases the rate of interest of analysing all issues of market structure.