Details of Monetry Policy.

1. MONETARY POLICY
BY: KUMARJEET

2. MONETARY POLICY
 MEANING – “Monetary policy is concerned with deciding how much money the
economy should have or perhaps more correctly deciding whether to
increases or decrease the purchasing power of money .”
 Monetary policy is the process by which the monetary authority of a country
control the supply of money for the purpose of promoting economic growth
and stability.
 In other words – This policy is adopted by the central bank
of an economy in order to control and regulate the money supplying the
country as to stabilize the economy .The main function of monetary policy is
to control and regulate credit money.

3. MONETARY POLICY
 DEFINITION OF MONETARY POLICY
 According to Macconal : “changing the money supply to assist the economy to
achieve a full employment .”
 According to Harry G. Johnson : “Monetary policy employing the central bank
control of supply of money as an instrument for achieving the objectives of
general economic policy .
 RESERVE BANK STATES THAT :-Monetary policy refers to the use of instruments
under the control of the central bank to regulate the availability ,cost and
use of money and credit .

4. MAKING OF MONETARY POLICY
 Monetary policy is communicated to the public mostly by annual monetary
policy statement in april and the mid term review in October .
 The statements today are more analytical.
 RBI website is an effective medium of communication .
 Governor ,deputy governors , committee of the board ,meet every week to
review the monetary ,economic and financial conditions
 Mechanisms such as resource management of banks ,supervisory data market
information ,economic and statistical analysis etc are used.
 Periodic consultation with ministory of finance for significant ,technical
,analytical ,institutional and dynamic inputs.

5. GOALS OF MONETARY POLICY
 Neutrality of money : - Economists like Wick steed , Hayek, and Robertson are
the chief exponents of neutral money .They hold the view that monetary authority
should aim at neutrality of money in the economy . Any monetary policy is the
root cause of all the economic fluctuations .
 Exchange stability :it was the traditional objectives of the monetary authority .
This was the main objectives under gold standard among different countries when
there was disequilibrium in the balance of payments of the country ,it was
automatically corrected by movements .It was popularly known as expand
currency and credit when gold is coming in ,contract currency and credit when
gold is going out . This system will correct the disequilibrium in the balance of
payments and exchange stability will be maintained .
 Price stability : it promotes business activity and ensures equitable distribution of
income and wealth. It discourages exports and encourages imports .

6.  Full employment : During world depression ,the problem of unemployment had increased
rapidly .It was regarded as socially dangerous ,economically wasteful and morally deplorable
.Thus ,full employment assumed as the main goal of monetary policy. Full employment means
absence of involuntary unemployment .
 High rate of economic growth:- it means utilization of all the productive natural ,human and
capital resources in such a manner as to ensure a sustained increase in national and per
capita income over time
 Equilibrium in the balance of payments : Equilibrium in the balance of payments is another
goal of monetary policy which emerged significant in the post war years .

7. TOOLS OF MONETARY POLICY
 QUANTITATIVE TOOLS :
 OPEN MARKET OPERATIONS :- The buying and selling of government
securities by the reserve bank on secondary markets.
 BANK RATES:- The rate at which RBI lends money to domestic banking system.
 CRR( CASH RESERVE RATIOS ) : - Banks in India are required hold a certain
proportion of their deposits in the form of cash with reserve bank of India
.This minimum ratio is known as the CRR or cash reserve ratio.
 SLR (STATUTORY LIQUIDITY RATIO) : - The minimum percentage of deposits
that the bank has to maintain in form of gold ,cash or other approved
securities is known as SLR.

8. CONTINUE………..
 REPO AND RESERVE REPO RATE : - The interest rate at which RBI provides loan
to commercial banks is called Rapo rate .
 The rate at which RBI takes short term credit is reserve Rapo rate .
 DEPOSIT RATE :- The rate at interest at which the customers are paid interest
on their bank deposits

9. IMPORTANCE OF MONETARY POLICY
 Monetary policy regulates currencies and reserves
 Manages the monetary and the credit system
 Maintains the par value of domestic currencies
 Promotes and maintains a high level of production ,employment and economic
growth .
 Ensures balance of equilibrium
 Creates full employment
 Regulates neutrality of money
 Ensures equal income distribution

10. LIMITATIONS OF MONETARY POLICY
 Monetary policy cannot change long term growth.
 There is no long term trade off between growth and inflation .
 Monetary policy can deliver low and stable inflation ,and thereby reduce the
volatility of the business cycle .
 It cannot really predict when inflationary pressure builds up.
 Time tag
 Lack of coordination between monetary policy and fiscal policy.

11. OBJECTIVES OF MONETARY POLICY
 UNDER DEVELOPED COUNTRIES
 DEVELOPED COUNTRIES

12. CONTINUE….
 UNDERDEVELOPED COUNTRIES :-
 To achieve full employment
 To have high efficiency
 To have large scale of resources mobilization
 To increase exports
 To have high investment
 To provide price and exchange stability
 To have efficient allocation and utilization of resouces
 To raise living standards

13. CONTINUE
 DEVELOPED COUNTRIES
 To have high aggregate demand without inflation
 Eradicate inflationary and deflationary gap
 High research /further development
 Providing assistance to other countries
 Gaining monetary control over others

14. SCOPE OF MONETARY POLICY
 Short term interest rates
 Long term interest rates
 Exchange rates
 Credit quality
 Bonds and equities (corporate ownership & debt )
 Government vs public sector spending / saving
 International capital flow of money on large scale

15. ROLE OF MONETARY POLICY IN ECONOMIC GROWTH
 Economic growth can be speeded up by accelerating the rate of savings and
investment in the economy .This requires the following steps :
 Increase in aggregate rate of savings ,
 Mobilization of these savings so that they are made for the purpose of
investment and production
 Increase in the rate of investment
 Allocation of investment funds for productive purposes and priority sectors of
the economy .

16. CONCLUSION
 For an effective anti –cyclical monetary policy ,bank rate ,open market
operations , reserve ratio and selective measures are required to be adopted
simultaneously .But it has been accepted by all monetary theorists that ..
 1. The success of the monetary policy is nil in a depression when business
confidence is at its lowest
 2. It is successful against inflation the monetarists contend that as against
fiscal policy ,monetary policy ,possesses greater flexibility and it can be
implemented rapidly.