CREDIT AND MONETARY PLANNING

MONETARY POLICY
It refers to those policy measures of the central bank which are adopted to control and regulate the volume of currency and credit in a country. According to Paul Einzig, an ideal monetary policy may be defined as an effort to reduce to a minimum the disadvantages and increase the advantages resulting from the existence and operation of a monetary system. Policy pursued by the central bank of a country for administering and controlling countrys money supply including currency and demand deposits and managing the reign exchange rates

ELEMENTS OF MONETARY POLICY I. Quantitative Elements

1) BANK RATE 1) OPEN MARKET OPERATIONS It refers to sale and purchase of Govt. securities by the RBI If RBI wants to contract money supply offers to sale govt. securities if RBI wants to expand money supplyoffers to purchase govt. securities Repo rate - Rate at which short term loans are given by one bank to another against govt. securities Reverse repo rate - Is the rate that RBI offers the banks for parking their funds

3) CASH RESERVE RATIO & STATUTORY LIQUIDITY RATIO

The percentage of banks deposits which they must keep as cash with RBI SLR -All Bank have to keep a portion of total deposits with itself in liquid assets. Bank Rate Lending capacity of commercial banks reduces Thus Loans become EXPENSIVE Contraction of credit CRR/ SLR Reduces reserves for lending Contracting Credit Bank Rate Banks get loans at cheaper rates. Thus then can control the liquidity and maintain the inflation

II. Qualitative element

1. REPO & REVERSE REPO RATES 2. MARGIN REQUIREMENT REGULATION OF CREDIT RATIONING OF CREDIT. 3. PRESS RELEASE ON VARIABLE INTEREST RATE LIKE REPO & REVERSE REPO RATE. 4. PERSISTS AT UNCOMFORTABLE LEVELS AND WILL CONTINUE WITH ITS ANTI-INFLATIONARY MONETARY POLICY

OBJECTIVES OF MONETARY POLICY

Maintain price stability. Adequate flow of credit to all sectors of the economy/ neutrality of money. Exchange Stability/ Exchange Stability Norms for the banking and financial sector and the institutions which are governed by it. Ensure overall economic growth & Full employment. Two very important things in objective: (a) Expansion in the supply of money, and (b) Restraint on the secondary expansion of credit.

LIMITATIONS OF MONETARY POLICY

1. Monetary policy, to be effective, should be able to regulate supply and cost of credit. As we have underdeveloped money and capital market. Reserve Bank is rendered difficult by the limitations inherent in the various instruments of monetary control. As there is no integrated rate of interest structure In part the freedom to curtain Reserve Bank accommodation for banks is also constrained by the fact that the device of offering preferential facilities has been used for encouraging banks to lend. Their is a lack of cooperation between the commercial banks. There is a special consideration that hitherto neglected sectors should be shielded as far as possible from credit curbs. The type of the policy the Reserve Bank has pursued so far requires the presence of a sound statistical and monitoring system. Illiteracy and social obstacles.

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