Monetary Policy Of India: Before & After Liberalization

SUBMITTED BY: Amit Rangle Prathamesh Nangare Manish Rathod Avadh Yadav Mandar Devekar Dharmesh Agarwal

List of Contents

Introduction Of RBI Pre-Liberalization Age: A Struggle Evolution Of Monetary Policy History Of Monetary Policy What is Monetary policy? Goals/Objectives of Monetary Policy Types Of Monetary Policy Instruments/ Tools Of Monetary Policy Monetary Policy Framework Monetary Policy Transmission Mechanism Limitations Of Monetary Policy

Reserve Bank Of India

The Central Bank Of The Country-RBI.

Established In 1935 With a Share Capital Of Rs. 5 crores on the basis of the Hilton Young Commission. The Share Capital was Divided into Rs. 100 each fully paid up which was entirely owned by private shareholders in the beginning. RBI was nationalized in 1949.

Pre-Liberalization Age: A Struggle

A Balance of Payments (BOP) crisis in 1991 which pushed the country to near bankruptcy
The Rupee devalued and economic reforms were forced upon India India central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks worth of imports No FDI & FII Investments

Evolution Of Monetary Policy In India

After the crises in 1991, stabilization went simultaneously with structural reforms. Change in context fundamentally altered the manner in which monetary policy began to be formulated Macroeconomics and price stability received greater emphasis Continuous rebalancing of priority between growth and price stability

History Of Monetary Policy

With the creation of the bank of England in 1694,which acquired the responsibility to print the notes and back them with gold after that monetary policy as independent established. The goal of monetary policy was to maintain the value of the coin, print notes which would trade at par to spicie. and prevent coins from leaving circulation. During the year 1870-1920, the industrialized nations set up central banking system.

What is Monetary Policy?

A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy.

Objectives Of Monetary Policy

Maintain Price Stability. Credit availability and economic growth Exchange Rate Stability Financial stability

Types Of Monetary Policy

Expansionary Monetary Policy Contractionary Monetary Policy Countercyclical Monetary Policy Rule Based Monetary Policy Discretionary Monetary Policy

Instruments of Monetary Policy

SLR
QUALITATIVE

Bank rate

Open market operations

QUANTITATIVE Credit Rationing

Change in Lending margins

Moral Suasion

Cash Reserve Ratio

Direct Controls

Quatitative Instruments

Open Market Operations (OMO): It means the purchase and sale of securities by the central bank of the country. The OMO is the most powerful and widely used tool of monetary control.
Bank Rate: Bank rate is the rate at which the central bank rediscounts the bills of exchange presented by the commercial banks. For practical purposes bank rate is the rate which the central bank charges on the loans and advances to the commercial banks.

The Cash Reserve Ratio (CRR): Cash Reserve Ratio is the percentage of total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank.
Statutory Liquidity Requirement (SLR): The SLR Is that proportion of the total deposits which commercial banks are required to maintain with them in the form of liquid assets (cash reserve, gold and govt. bonds) in addition to CRR.

Qualitative Instruments

Credit Rationing: Under this two measures are adopted: Imposition of upper limits on the credit available to large industries and firms. Charging a higher interest rate on bank loans beyond a certain limit. Change In Lending Margins: The banks provide loans only upto a certain percentage of the value of the mortgaged property. The gap between the value of the mortgaged property and amount advanced is called lending margin.

 Moral Suasion: The moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country.

Direct controls: Where all other methods prove ineffective, the monetary, authorities resort to direct control measures with clear directive to the banks carry out their lending activity in a specified manner.

Monetary Policy Framework

The final objectives or goals of monetary policy are not in direct control of monetary policy, the central bank often targets certain variables, know as policy variables. Thought these are not objectives in themselves but if attended, help in achieving the ultimate goals. The policy targets are classified as intermediate targets and operating targets.

Monetary Policy Framework

The intermediate targets are also not in direct control of monetary authorities and cannot be hit very accurately and involve a substantial time lag. But these have close bearing with the final objectives. The examples of intermediate targets are various monetary aggregates, such as M1, M2, M3 and long term interest rates, such as prime lending rate and tresury bond yields.

Monetary Policy Framework

The operating targets, on the contrary, are tactical goals, can be influenced more directly and can be affected in much short duration by the central bank. The operating goals, such as bank reserves, base money and short-term money benchmark rates, have a close bearing on the intermediate targets such as various monetary aggregates and long term interest rates.

Monetary Policy Framework

Thus, central banks, while conducting monetary policy, have to make decisions at both strategic and tactics level. At the strategic level, the emphasis is on the minimization of the gap between goals and performance, whereas at the tactical or day to day basis central banks have to deal with the use of policy tools for achieving the desired values of operating targets.

Monetary Policy Transmission Mechanism

Interest Rate Other Asset Price Channel Exchange Rate Channel Credit Channel
Bank lending Channel Balance Sheet Channel

Limitations Of Monetary Policy

The time lag : The first and the most important limitation in the effective working of monetary policy is the time lag. i.e. time taken in chalking out the policy action, its implementation and working time.
Problem in forecasting : The formulation of an appropriate monetary policy requires a reliable assessment of the magnitude of the problem-recession or inflation- as it helps in determining the appropriate policy measures.

Non-banking Financial Intermediaries: The structural change in the financial market has also reduced the scope of effectiveness of monetary policy.

Under Development of money and capital markets : The effectiveness of monetary policy in less developed countries is reduced considerably because of the underdeveloped character of their capital and money

markets.