Monetary policy

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Simple way to learn about monetary policy

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Monetary policy

  1. 1. MONETARY POLICY PRESENTED BY AJITH YESHWANTH UTTHAM KUMAR VIJAY THOMPSON AMITY GLOBAL BUSINESS SCHOOL
  2. 2. Monetary policy  is the process by which the monetary authority of a country controls the  supply of money , often targeting a rate of interest  to attain a set of objectives oriented towards the growth and stability of the economy.
  3. 3.   Goals – to maintain relatively stable prices and low unemployment
  4. 4. Monetary policy is referred to as either being an  expansionary policy , or a  contractionary policy. <ul><li>Expansionary policy increases the total supply of money in the economy rapidly </li></ul><ul><li>Contractionary policy decreases the total money supply, or increases it slowly. </li></ul>
  5. 5. <ul><li>Expansionary policy is used to combat unemployment in a recession by lowering interest rates </li></ul><ul><li>  Contractionary policy involves raising interest rates to combat inflation. </li></ul>
  6. 6. In every country a special institution exists which has the task of executing the monetary policy
  7. 7. TOOLS OF MONETARY POLICY IN INDIA <ul><li>BANK RATES </li></ul><ul><li>CRR </li></ul><ul><li>SLR </li></ul><ul><li>REPO RATE </li></ul>
  8. 8. BANK RATE <ul><li>Bank Rate is the rate at which RBI  allows finance to commercial banks. </li></ul><ul><li>Bank Rate is a tool, which central bank  uses for short-term purposes. </li></ul><ul><li>Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. </li></ul><ul><li>This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. </li></ul>
  9. 9. CRR <ul><li>RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. </li></ul><ul><li>Increase in CRR means that banks have less funds available and money is sucked out of circulation.  </li></ul><ul><li>Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to  control liquidity in the system, and thereby, inflation by tying the  hands of the banks in lending money. </li></ul>
  10. 10. SLR <ul><li>  SLR stands for Statutory Liquidity Ratio. </li></ul><ul><li>This term indicates  the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. </li></ul>
  11. 11. REPO AND REVERSE REPO RATE <ul><li>REPO RATE </li></ul><ul><li>It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. </li></ul><ul><li>Therefore, we can say that in case,  RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate </li></ul><ul><li>REVERSE REPO RATE </li></ul><ul><li>It is the rate at which banks park their short-term excess liquidity with the RBI.  The RBI uses this tool when it feels there is too much money floating in the banking system.  </li></ul><ul><li>An increase in the reverse repo rate  means that the RBI will borrow money from the banks at a higher rate  of interest. As a result, banks would prefer to keep their money with the RBI </li></ul>
  12. 12. Second Quarter Review of Monetary Policy 2010-11 <ul><li>The Bank Rate has been retained at 6.0 per cent. </li></ul><ul><li>  It has been decided to increase the repo rate under the  liquidity adjustment facility (LAF) by 25 basis points from 6.0 per cent to 6.25 per cent with immediate effect. </li></ul><ul><li>It has been decided to increase the reverse repo rate under the LAF by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. </li></ul><ul><li>  The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net demand and time liabilities. </li></ul>
  13. 13. Expected Outcomes <ul><li>  Sustain the anti-inflationary thrust of recent monetary actions and outcomes in the face of persistent inflation risks. </li></ul><ul><li>Rein in rising inflationary expectations, which may be aggravated by the structural nature of food price increases. </li></ul><ul><li>  Be moderate enough not to disrupt growth. </li></ul>
  14. 14. THANK YOU !

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