Monetary Policy Reformspptx.pptx

1. Jasmine Kaur
Assistant Professor
RGNUL

2.  Monetary policy refers to the policy of the central bank with regard to
the use of monetary instruments under its control to achieve the well-
defined objectives
 It is the control of availability, cost and the use of money and credit
 The Reserve Bank of India is vested with the responsibility of
conducting the monetary policy in India
 The Reserve Bank’s monetary policy department assists the
monetary policy committee in formulating the monetary policy

3. Price Stability
Economic Stability
Maximisation of Employment
Economic Growth
Stabilisation of Money Market

4. Bank rate
Open market operations (OMOs)
Cash reserve ratio (CRR)
Liquidity adjustment facility-repo rate and
reverse repo rate

5. Marginal requirements
Regulation of consumer credit
Credit rationing
Moral suasion
Publicity
Direct action

6. Goals of monetary policy
Tools and instruments
Operating targets
Intermediate targets

7.  It has evolved in response to varying
macroeconomic situations over a period of
time
 In the initial years of establishment of RBI,
liquidity was mainly regulated through the
instruments of OMOs, bank rate and CRR

8.  Soon after independence, the central bank
coordinated with the planned development
process of the nation
 The period of 1970s till mid 1980s was
marked by monetization of fiscal deficit and
changes in CRR were undertaken to reduce
inflationary pressures

9.  RBI began to deemphasize the role of monetary aggregates
and implemented a Multiple Indicator Approach (MIA) to
monetary policy in 1998
 The MIA approach was developed on the basis of
recommendations of RBI’s working group on money supply
 The MIA approach encompassed all economic variables such
as money, credit, output, inflation rate, interest rate, etc. which
helped in the formulation of monetary policy

10.  The significance of focusing on inflation was first highlighted in
the Report of the Committee on Financial Sector Reforms
2009
 Dr. Raghuram Rajan set up an expert committee in 2013 to
review and strengthen the monetary policy framework
 The Flexible Inflation Targeting (FIT) was formally adopted in
India with the signing of monetary policy framework
agreement between GOI and RBI in 2015

11.  The RBI Act 1934 was amended to provide a statutory basis for the
implementation of FIT framework in 2016
 The amended RBI act provides that the central government shall, in
consultation with the central bank determine the inflation target in terms of
CPI, once in every five years
 Target for the period from August 5, 2016 to March 31, 2021- 4% CPI
inflation with the upper tolerance limit of 6% and lower tolerance limit of 2%
 The MPC kept the inflation target unchanged at 2-6 percent for the next five
fiscal years i.e. 2021-2026

12.  A breach of tolerance level for three consecutive quarters will
constitute a failure of monetary policy
 In case RBI fails to meet the target, RBI is required to-
 provide reasons for the failure
 suggest remedial measures and
 provide expected time to return inflation to the target

13.  The amended RBI Act, 1934 provides for a statutory
framework for a six-member Monetary Policy
Committee (MPC) to be constituted by central
government
 With the formation of MPC, the Technical Advisory
Committee ceased to exist
 Members of MPC-RBI’s Governor, Deputy Governor of
the Bank, One officer to be nominated by central board
and three external members

14. Instrument Current Rate
CRR 3%
SLR 18%
Repo Rate 4%
Reverse Repo Rate 3.35%
Bank Rate 4.25%
Marginal Standing Facility Rate 4.25%

15. THANK YOU