3. Introduction
MONETARY POLICY is the process by which monetary
authority of a country, generally central bank controls the
supply of money in the economy by its control over interest
rates in order to maintain price stability and achieve high
economic growth.
RBI is the central bank of India.
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4. OBJECTIVES :
IN INDIA, THE CENTRAL MONETARYAUTHORITY IS
THE RESERVE BANK OF INDIA (RBI). MONETARY
POLICY IS DESIGNED TO MAINTAIN THE
FOLLOWING OBJECTIVES:
FULL EMPLOYMENT
PRICE STABILITY
ECONOMIC GROWTH
BALANCE OF PAYMENTS
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5. Full Employment -: Full employment has been ranked
among the foremost objectives of monetary policy. It is an
important goal not only because unemployment leads to
wastage of potential output, but also because of the loss of
social standing and self-respect.
Price Stability -: One of the objectives of monetary policy
is to stabilise the price level. Both economists and laymen
favour this policy because fluctuations in prices bring
uncertainty and instability to the economy.
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6. Economic Growth -: One of the most important
objectives of monetary policy in recent years has been the
rapid economic growth of an economy. Economic growth is
defined as “the process whereby the real per capita income
of a country increases over a long period of time.”
Balance of Payments -: Another objective of monetary
policy since 1950s has been to maintain equilibrium in
the balance of payments.
BOP is the record of all transactions between resident of
the country and rest of the world during a particular
period.
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7. Types of monetary policy
There are two types of monetary policies :
▶ Expansionary monetary policy
▶ Contractionary monetary policy
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8. Expansionary monetary policy
• Expansionary monetary policy is when a central bank uses its
tools to expand the economy by increasing the money supply and
lowering interest rates which increases aggregate demand. That
boosts economic growth as measured by Gross Domestic Product
(GDP).
• It is used during recession.
• Recession is a temporary period of economic decline during
which trade and industrial activity are reduced.
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9. Contractionary monetary policy
Contractionary monetary policy are set of tools that slow down
the growth rate of the economy to prevent it from overheating ,
these tools includes the credit flow in the economy, interest rate
and currency exchange.
Here monetary policy are being used during Inflation.
Inflation is continuous increase in the price level of goods and
services. And increase in supply of money as compared to some
benchmark.
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10. Tools of monetary policy
▶Cash Reserve Ratio (CRR) -: Cash Reserve Ratio is a
certain percentage of bank deposits which banks are
required to keep with RBI in the form of reserves or
balances. Higher the CRR with the RBI lower will be the
liquidity in the system and vice versa.
▶Statutory Liquidity Ratio (SLR)-:It is the Indian
government term for reserve requirement that the
commercial banks in India require to maintain in the
form of gold, government approved securities before
providing credit to the customers.
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11. ▶ Repo Rate -: Repo rate is the rate at which RBI lends to its clients
generally against government securities. Reduction in Repo rate helps
the commercial banks to get money at a cheaper rate and increase in
Repo rate discourages the commercial banks to get money as the rate
increases and becomes expensive.
▶ Reverse Repo Rate -: Reverse Repo rate is the rate at which RBI
borrows money from the commercial banks. The increase in the Repo
rate will increase the cost of borrowing and lending of the banks which
will discourage the public to borrow money and will encourage them to
deposit.
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12. ▶ Bank Rate -: It is the rate at which the Reserve Bank is ready to
buy or rediscount bills of exchange or other commercial papers.
This rate has been aligned to the MSF rate and, therefore,
changes automatically as and when the MSF rate changes
alongside policy repo rate changes.
▶ Open Market Operations (OMOs) -: These include both
outright purchase/sale of government securities for
injection/absorption of durable liquidity, respectively.
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13. ▶Marginal Standing Facility (MSF) -: A facility under
which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve
Bank by dipping into their Statutory Liquidity Ratio
(SLR) portfolio up to a limit (currently two per cent of
their net demand and time liabilities deposits) at a penal
rate of interest.
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14. Current monetary policy of India
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The Reserve Bank of India announced renewed rate
hikes in the August 2022 Monetary Policy
committee review. The repo rate was hiked by 50
bps to 5.40 per cent. The RBI Governor Shaktikanta
Das stated that inflation is a primary concern, and
stressed that in the near term will be observing a 4
per cent inflation.
15. Following are the current data of the
present monetary policy instruments
used by the Reserve Bank of India
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Policy Repo Rate : 6.25%
Reverse Repo Rate : 5.75%
Rate
Marginal Standing Facility
: 6.75%
CRR : 4%
SLR : 20.75%
Bank Rate : 6.75%
16. Conclusion
The monetary policy deals with the function of money
supply in the market keeping this in mind that it should not
cause the situation of inflation and recession . The Reserve
bank of India is the central authority of the monetary policy
In India which use different instruments to control the
inflow and outflow of the money in the economy .
Monetary policy is very important for the economic growth
of a country , its instruments play a very important role to
adjust the economic condition according to the current
economic situation
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