Monetary policy of RBI-India's central bank

1. MONETARY POLICY
Presented by
AMEYA PATIL
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7. ) Dr. Raghuram Rajan
Former Governer of
Reserve Bank of India (RBI)
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8. MONETARY POLICY
MEANING
Monetary policy refers to the steps taken by the RBI to
regulate the cost & supply of money & credit in order
to achieve the socio-economic objectives of the
economy. Monetary policy influences the supply of
money the cost of money or the rate of interest and
the availability of money.
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9. How is the Monetary Policy different
from the Fiscal Policy?
 The Monetary Policy regulates the supply of money and the cost
and availability of credit in the economy. It deals with both the
lending and borrowing rates of interest for commercial banks.
 The Monetary Policy aims to maintain price stability, full
employment and economic growth.
 The Monetary Policy is different from Fiscal Policy as the former
brings about a change in the economy by changing money supply
and interest rate, whereas fiscal policy is a broader tool with the
government.
 The Fiscal Policy can be used to overcome recession and control
inflation. It may be defined as a deliberate change in government
revenue and expenditure to influence the level of national output
and prices.
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10. Monetary policy- Meaning
The part of the economic
policy which regulates the
level of money in the economy
in order to achieve certain
objectives.
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11. OBJECTIVES
 The objectives are to maintain price stability and
ensure adequate flow of credit to
the productive sectors of the
economy.
Stability for the national currency (after looking at
prevailing economic conditions), growth in employment
and income are also looked into. The monetary policy
affects the real sector through long and variable periods
while the financial markets are also impacted through
short-term implications.
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12. OBJECTIVES
Economic Growth
Full Employment
Flow of credit in all sectors of economy
Price Stability
Exchange rate stability
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13. There are two types of monetary policy:
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14. Expansionary monetary policy is appropriate when the economy is in
recession and unemployment is a problem.
The goal of expansionary monetary policy is to reduce
unemployment. Therefore the tools would be an increase in the
money supply.
To increase the money supply the federal government can:
• Buy government bonds(open market purchase)
• Lower the interest rate
• Lower the reserve ratio
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15. Diagram
Money
supply rise
Interest
rate decline
Investment
level rise
Aggregate
demand
rise
Real GDP
rise
Unemployme
nt decline
Price
rise
Inflatio
n rise
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16. Contractionary monetary policy is appropriate when economy is in
expansion and inflation is a problem.
The goal of contractionary monetary policy is to reduce inflation.
Therefore the tool would be the decrease in the money supply.
To decrease the money supply the federal reserve can:
• Sell government bonds(an open market sell)
• Raise the interest rate
• Raise the reserve ratio
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17. decreasing inflation. But it may also cause some unemployment.
Change the money supply affect the economy through these
process:
Money
supply
decline
Interest
rate rise
Investmen
t level
decline
Aggregate
demand
decline
Real GDP
decline
Unemployment
rise
Price
decline
Inflatio
n
decline
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19. Repo/Policy rate
Bank rate
Open market operations(OMO)
Cash reserve ratio (CRR)
Statutory liquidity ratio (SLR)
Quantitative measures
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20. Repo Rate
LOAN TAKER = BANK (Short term
loans through selling and further
agreeing to repurchase Government
securities
Reverse Repo Rate
LOAN TAKER =
RBI (Repo > Reverse repo)
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21. Quantitative measures
Bank rate :
Bank Rate is the rate at which central
bank of the country (in India it is
RBI) allows finance to commercial
banks. (Long-term loans).
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22. Bank Rate of Interest
 It is the interest rate which is fixed by the RBI to control the
lending capacity of Commercial banks . During Inflation , RBI
increases the bank rate of interest due to which borrowing
power of commercial banks reduces which thereby reduces the
supply of money or credit in the economy .When Money
supply Reduces it reduces the purchasing power and thereby
curtailing Consumption and lowering Prices.
 CURRENT BANK OF INTEREST IS
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23. IF :
Bank Rate
Bank Rate
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24. Cash reserve ratio (CRR)
Quantitative measures
This serves two purposes. It
ensures that a portion of bank
deposits is totally risk-free.
It enables that RBI control
liquidity in the system, and
thereby, inflation by tying
their hands in lending money
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25. Cash Reserve Ratio
CRR, or cash reserve ratio, refers to a portion of deposits
(as cash) which banks have to keep/maintain with the RBI.
During Inflation RBI increases the CRR due to which
commercial banks have to keep a greater portion of their
deposits with the RBI . This serves two purposes. It ensures
that a portion of bank deposits is totally risk-free and
secondly it enables that RBI control liquidity in the system,
and thereby, inflation.
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26. Statutory Liquidity Ratio
Banks are required to invest a portion of their
deposits in government securities as a part of their
statutory liquidity ratio (SLR) requirements . If
SLR increases the lending capacity of commercial
banks decreases thereby regulating the supply of
money in the economy.
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27. CRR/SLR
CRR/SLR
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28. Open market operations
Quantitative measures
An open market operation (also
known as OMO) is an activity by a
central bank to buy or sell government
bonds on the open market.
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29. Open market Operations
It refers to the buying and selling of Govt. securities
in the open market . During inflation RBI sells
securities in the open market which leads to transfer
of money to RBI.Thus money supply is controlled in
the economy.
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30. Margin requirements (LTV ratio)
Moral Suasion
Direct Action
Regulation in consumer credit
Qualitative Measures –
Direct Tools-Specific Sector
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31. Margin Requirements
 During Inflation RBI fixes a high rate of margin on
the securities kept by the public for loans .If the
margin increases the commercial banks will give less
amount of credit on the securities kept by the public
thereby controlling inflation.
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32. REGULATION IN CONSUMER
CREDIT
Qualitative Measures
most of the consumer durables like T.V.,
Refrigerator, Motorcar, etc. are available on
installment basis.
If there is excess demand for certain consumer
durables leading to their high prices, central bank
can reduce consumer credit by (a) increasing down
payment, and (b) reducing the number of
installments of repayment of such credit.
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33. DIRECT ACTION
Qualitative Measures
This method is adopted when a
commercial bank does not co-operate
the central bank in achieving its
desirable objectives.
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34. MORAL SUASION
Qualitative Measures
To arrest inflationary situation central bank persuades and request the commercial
banks to refrain from giving loans for speculative and non-essential purposes.
On the other hand, to counteract deflation central bank pursuades
the commercial banks to extend credit for different purposes.
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35. LATEST MONETARY POLICY ?
THE
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