A case study onMonetary policy Presented by: Kuldeep yadav Section – A Reg no – 6024
MONETARY POLICY : Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate. (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.
OBJECTIVES OF MONETARY POLICY
Stability of exchange rate
High rate of economics growth
Distribution of money
TOOLS OF MONETARY POLICY The tools of monetary are not themselves inherently political. The Federal Reserve can raise or lower the interest rates charged to member banks; this, in turn, results in the member banks raising or lowering the interest rates that they charge their customers. This is one of the most common tools of monetary policy, and the meetings of the Federal Reserve Board are now watched carefully by members of mainstream as well as business media. Possible pronouncements are eagerly anticipated and business decisions and the stock market both react both to rumors as well as actual decisions
Trends in central banking:
The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank. The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements. If the central bank wishes to lower interest rates, it purchases government debt, thereby increasing the amount of cash in circulation or crediting bank’s reserves accounts. Alternatively, it can lower the interest rate on discounts or overdrafts (loans to banks secured by suitable collateral, specified by the central bank).
Types of monetary policy The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.
monetary policy operates by influencing the pricing of money i.e. ,the cost of borrowing and the income from saving the reserve of india sets the bank rate .this is an interest rate for the reserve bank’s own .
It will influence interest rate change overdraft and mortgage as well as for saving account. A change in Bank rate will also and share .
Most Bank would try to compensate for the loss of income, by adjustment in deposit rate to neutralize the impact on their net interest income they would reduce the cost of fond and also bring down the interest rate.
This encourage saving to invest to spent the memory on alternative like property and company shares any fall in demand for there assets will reduce their price. Similarly the significant fall in interest rate will result in higher stock prices.
In global market the exchange rate in influenced , both by expectation about future interest rate and by and unexpected changing in interest rate. This is because of investors expect interest rate to rise, they may be increase the amount they invest in a currency before interest rate actually rise