Policy Instruments are specific tools central banks use to execute monetary policy. Primary instruments: Repo rate (interest rate for overnight lending to banks)—primary transmission channel; influences all other rates. Reserve requirements: CRR (Cash Reserve Ratio—percentage of deposits banks must hold as reserves), SLR (Statutory Liquidity Ratio—percentage held in safe liquid assets). Open Market Operations (OMOs): Buying and selling securities (bonds) in open market; increases/decreases money supply and interest rates. Discount window: Rate at which central bank lends to banks; higher rate discourages borrowing (contractionary). Quantitative easing: Direct asset purchases during extreme crises; unconventional tool. Macroprudential instruments: Loan-to-value limits, capital requirements, countercyclical buffers—enhance stability. Regulatory instruments: Liquidity coverage ratio, net stable funding ratio—ensure bank stability. Forward guidance: Communication tool; signals future policy, shapes expectations. International instruments: Foreign exchange intervention, capital controls—manage exchange rates. Effectiveness varies: Reserve changes quick but blunt; OMOs finer adjustment; macroprudential tools address systemic risks. Indian context: Repo rate primary; CRR, SLR historically important; macroprudential instruments increasingly used. ICAI focus: Understanding each instrument, its mechanism, when used. Exam tip: Repo rate is main instrument; changes in CRR/SLR have stronger multiplier effects than OMO size changes.