Meaning of Monetary Policy1.The Monetary Policy is the policy statement, traditionally aannounced twice a year.2. Monetary policy is the management of money supply andinterest rates by central banks to influence prices and employment.3.These factors include - money supply, interest rates and theinflation.4.Reserve Bank of India (RBI) is the Central Bank of Indiawherein it also announces norms for the banking and financialsector and the institutions which are governed by it.5.During the times of high inflation price rise is sought to becontrolled by reducing the money supply and raising the interestrates which brings about a fall in aggregate demand and prices.
When is the Monetary Policy announced?1. Historically, the Monetary Policy is announced twice a year2.a slack season policy (April-September) and a busy season policy(October-March) in accordance with agricultural cycles.3.The Reserve Bank of India announced all its monetarymeasures twice a year in the Monetary and Credit Policy .4.With the share of credit to agriculture coming down andcredit towards the industry being granted whole yeararound, the RBI since 1998-99 has moved in for just one policyin April-end.
The Objectives of Monetary Policy1.Economic Growth:In both rich as well as poor countries the primaryobjective of a monetary policy is sustained economic growth2. Full employment:All productive resources under an economy must beemployed according to the monetary policy formulated by thecentral bank.Inflation and deflation period must be avoided.Moderate growth in prices i.e. under 3% per annum will beconsistent with the objective of attaining price stability.3. Price Stability:
Features of Monetary Policy of India since 90’s.1. Slow growth:Another major factor in controlling this growth was thelower level of foreign exchange inflows.2.Monetary Growth:Despite falling inflation, real rates faced by industryremained high.3. Growth of M3:Growth in broad money (M3) in 1997-98 registered anincrease, higher than the RBIs growth target.4. Credit policy:The credit policy for April-October 1998, aimed toaccelerate industrial investment & output to meet business wants.
How does the Monetary Policy impact the individual?1. In recent years, the policy had gained in importance due toannouncements in the interest rates.2. Earlier, depending on the rates announced by the RBI, theinterest costs of banks would immediately either increase ordecrease.3. A reduction in interest rates would force banks to lower theirlending rates and borrowing rates.4. The financial sector reforms commenced, the RBI has movedtowards a market-determined interest rate scenario.5. The bank rate is a tool used by RBI for this purpose as itrefinances banks at the this rate. In other words, the bank rateis the rate at which banks borrow from the RBI.
How does the Monetary Policy affect thedomestic industry and exporters inparticular?Exporters look forward to the monetary policy since the centralbank always makes an announcement on export refinance, orthe rate at which the RBI will lend to banks which haveadvanced pre-shipment credit to exporters. A lowering of theserates would mean lower borrowing costs for the exporter.
How is the Monetary Policy different from theFiscal Policy?1. Two important tools of macroeconomic policy are MonetaryPolicy and Fiscal Policy.2.The Monetary Policy is different from Fiscal Policy as theformer brings about a change in the economy by changing moneysupply and interest rate, whereas fiscal policy is a broader toolwith the government.3.Fiscal policy may be defined as a deliberate change ingovernment revenue and expenditure to influence the level ofnational output and prices.4.The Monetary Policy aims to maintain price stability, fullemployment and economic growth.
Is the money supply related to jobs, wages and output?1. At any point of time, the price level in the economy isdetermined by the amount of money floating around.2. An increase in the money supply - currency with the public,demand deposits and time deposits - increases prices all round.3. The RBI follows a least-inflation policy, Jobs, wages andoutput are affected over the long run, if the trends of highinflation or low liquidity persist for very long period.4. If wages move slower than other prices, higher inflation willdrive real wages lower and encourage employers to hire morepeople
Indian Annual Monetary Policy 2008-2009:India’s Annual Monetary Policy declaration on 29th April, 2008is detailed as under:1. With inflation still in the double digits the Reserve Bank ofIndia announced a further increase in the Repo Rate by 0.5%to 9% and also a 0.25% increase in the Cash Reserve Ratio alsoto 9%.2. The central bank has also exuded confidence that the inflationwill be reined in soon with the ‘realistic’ target being to bring itdown to 7 percent by March 2009.3. However, the markets have responded negatively to the newsand have extended their losses with the Sensed crashing by 471points within minutes of the announcement by the apex bank.
4. Commercial, home, personal and car loans are sure to cost moreas the latest hike would suck up over Rs 8,000 crore of liquidityfrom the market.5. CRR is the percentage of amount that banks are required topark with the Reserve Bank. RBI had set a goal of limitinginflation to 5-5.5 percent.6. The Reverse Repo Rate (The short-term rate at which thecentral bank absorbs cash from the market) remains unchangedat 6 percent.7. The Bank Rate (rates used to price long-term loans to firmsand individuals) has also been kept steady at 6.0 percent.