Monetary Policy

Group members Selvi N Harish Nandipi Rambalaji Shariyank Vinu

MONETARY POLICY
The term monetary policy refers to actions taken by central banks to affect monetary magnitudes or other financial conditions. Monetary policy is an instrument which effect the credit flow in an economy. The variation effect the demand & supply of credit in an economy, and the level or nature of economic activities.

Objective
Stability in price level Economic development Arrangement of full employment Expansion of credit facility Equality & Justice Stability in exchange rate

Aims of Monetary policy

It is a part of general economic policy of the Government Thus it contributes to the achievement of the goals of economic policy. Aims of MP may be: Full employment Stable exchange rate Healthy BOP Economic growth Reasonable Price Stability Greater equality in distribution of income & wealth Financial stability

Monetary Policy RBIs role

Demand for Money

Demand for goods/services

Instruments such as CRR, OMO & Bank Rate

Ensuring price stability and ensuring savings

Control on money supply, velocity of circulation of money during inflation

Control on bank credit when prices rise/fall

INSTRUMENTS
GENERAL (QUANTITATIVE) Methods SELECTIVE (QUALITATIVE) Methods

Types
Bank rate policy Open market policy Cash reserve ratio Statuary reserve ratio

Bank Rate policy

Bank rate is the official minimum rate of interest at which central bank lends money to commercial banks Is known as the central banks lending rate Usually the central bank lends to commercial banks by re-discounting their bills of exchange. Bank rate is also known as the re-discount rate. In order to correct excess demand or inflationary situations, Central Bank increase bank rate. Consequent upon an increase in bank rate, commercial banks raise their lending rate to the general public. This makes the borrowing from commercial banks costlier Likewise, central bank can control the state or deficient demand or deflation by reducing the bank rate.

Open Market operation

Open market operation refers to the purchase and sale of Government securities by the Central bank in open market. In order to correct the excess demand or inflation, the central bank sells securities to the commercial banks and general public. When commercial banks buy securities, their cash reserves are reduced directly On the contrary, central bank can correct the state of deficient demand or deflation by purchasing securities in the open market.

Cash Reserve Ratio

Commercial bank has to keep a certain percentage of his deposits with central bank. It control the cash flow in economy.

It keeps changes in monetary policy framed by central bank of a country.

STATUARY LIQUIDITY RATIO

Its the percentage of demand and time maturities that banks need to have in the combinations of, Cash Gold Government securities The RBI can increase the SLR in case of inflation to suck the excess credit

Use of C.R.R. & S.L.R

In Inflationary situation o Increased the percentage of cash reserve ratio and Statutory liquidity ratio o It reduces the supply of money in an economy In Depressionary situation o Decreased the percentage of cash reserve ratio and Statutory liquidity ratio o It increases the supply of money in an economy

Open Market operation

Its include the sales and purchase by the central bank of . Assets Foreign exchange Gold Government securities Company securities

Use of Open Market operation

In the inflationary situation
In the Depressionary situation

Central bank decrease the money supply. Central bank sale out the securities to commercial bank and control money supply.

Central bank increase the money supply. Central bank purchase the securities from the commercial bank.

Function of credit regulation the quantitative methods

For expansion of credit For contraction of credit

Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R.

Increase the bank rate sales of securities Increase the C.R.R. Increase the S.L.R.

Qualitative Credit Control

The qualitative measures do not regulate the total amount of credit created by the commercial banks. These measures make distinction between good credit and bad credit and regulates only such credit which creates economic stability.

Methods of qualitative credit control

Prescription of margin requirements Consumer credit regulation Moral suasion Direct action

Monetary Policy Terminology

Inflation Money Supply (M3) Bank Rate Cash Reserve Ratio (CRR)

Statutory Liquidity Ratio (SLR)

Repo Rate Reverse Repo Rate Capital Adequacy Ratio (CAR) Open Market Operations (OMO)

Current Rates
Saving bank Bank Rate CRR 4.00% 6.0% 6.0 %

SLR
Repo Rate

24.0%
8.25%

Reverse Repo Rate 7.25% PLR Deposit rate 12% 15% 8.50% 9.50%
http://www.rbi.org.in

20

Limitations Monetary Policy

Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation Monetary policy is restricted by the impact of other government actions, especially Fiscal policy, i.e. decisions about government expenditures and taxation
Problems of an inflexible labour market, inadequate infrastructure and, most important, fiscal policy whose discipline is open to question limits the effectiveness of the Monetary policy

Monetary Policy cannot work in isolation!!

Thank You