2. What is monetary policy?
• Monetary policy is the process by which monetary authority
of a country, generally a central bank controls the supply of
money in the economy by exercising its control over interest
rates in order to maintain price stability and achieve high
economic growth. In India, the central monetary authority is
the Reserve Bank of India (RBI). is so designed as to
maintain the price stability in the economy.
3. OBJECTIVES OF MONETARY POLICY
To attain price stability
To control inflation
To promote economic growth
To attain exchange stability
To promote saving and investment
To control trade cycles
To promote employment
To regulate money supply in economy
4. INSTRUMENTS OF MONETARY POLICY
Bank rate
Statutory liquid ratio
Open market operations
Cash reserve ratio
Repo rate& reverse repo rate
Margin requirement
Credit ceiling
Direct action
Moral persuasion
5. Bank rate
It is the rate at which RBI lends to the commercial bank. If bank rate
is increased then commercial banks charge higher rate of interest on loans
given to public.
Statutory Liquid Ratio(SLR)
It means a certain percentage of deposits is to be kept by banks in
form of liquid assets in form of government securities, treasury bills and
other securities notified by RBI. If SLR is more banks have to keep more
deposits and hence less cash for loans available with banks.
Open market operations
It means the bank controls the flow of cash in market through sales
and purchase of securities in open market. When securities are purchased
by RBI.It makes payment to commercial banks &public. So the public and
commercial banks have more money with them. This expands credit in
market.
Cash reserve ratio(CRR)
It is a certain percentage of bank deposits which every bank is
required to keep with RBI in form of reserves or balances. Higher the CRR
lower will be the liquidity in market.
6. Repo Rate & Reverse repo rate
Repo rate is the rate at which RBI lends to commercial bank
against government securities. Reduction in repo rates helps the
commercial banks to get money at cheaper rate and increase in Repo rate
discourages the commercial banks to get money as rate increases and
become expensive. Reverse Repo rate is the rate at which RbI borrows
money from commercial bank. The increase in Repo rate will increase the
cost of borrowing and lending to the banks which will discourage the public
to borrow money and will increase them to deposit. As rates are higher the
availability of credit and demand decreases resulting to decrease in
inflation. The increase in Repo rate &Reverse Repo rate is a symbol of
tightening of policy.
Margin Requirement
Margin is the difference between loan value and market value of
security. It is fixed by RBI,for different types of loan margin requirement is
different. If margin % is more ,then less loan will be given for a certain value
of security. For priority sector margin requirement is less and where credit is
to be contracted margin requirement is less.
7. Moral Persuasion
Reserve bank ca also exercise moral influence upon its
member banks with a view to purse its monetary policy.RBI convinces bank
to curb loan to unproductive sectors. From time to time RBI holds meetings
with the member banks seeking their cooperation in effectively controlling
the monetary system of country.
Direct Action
According to 1949act ,Reserve bank can stop any
commercial bank from any transaction. In case of defiance of orders of the
RBI it can resort to direct action against the member bank. It can stop giving
loan and even recommend the closure of member bank to central
government under pressing circumstances.
Credit Ceiling
In this operation RBI issues prior information on direction that
loan to commercial bank will be given up to a certain limit. In this case
commercial bank will be tight in advancing loans to public. They will allow
loans to limited sector.
8. Key Indicators
Bank rate 9.0%
CRR 4.0%
SLR 22.0%
Repo Rate 8.0%
Reverse Repo Rate 7.0%
Marginal standing
Facility Rate
9.0%
Inflation 7.73%
as in august 2014
9. Recent changes made by RBI
• On 5th august RBI governor Mr.Raghu Ram Rajan brought down SLR from
22.50%to22% i.e. 50 bp cut in SLR which will inflow of Rs 40,000cr in Indian
market which means banks will be able to provide more finances for
development.
• On 5th august RBI governor Mr.Raghu Ram Rajan announced that there
would be no change in Repo rate ,he said that " What we are trying to do is
create an environment where we enhance the supply side without giving too
much encouragement to the demand side. So we need projects to be
completed, we need infrastructure to pick up because they are holding back
the supply side of the economy. We are trying to do this without providing
too much of a fillip to demand as this gives rise to inflationary pressure.”
Raghu Ram Rajan said that they have a target of bringing down the inflation
to 6% till January 2016.and his these steps were directed towards that only
and he said that we should not look towards the current benefit ,he said that
their target for this year is 8% and as they have just approached towards it
any much changes would not be feasible at this point.
10. Limitations of Money market
• Underdeveloped money market
• Existence of black money
• Conflicting objectives
• Lack of co-ordination with fiscal policy
• Limitations of monetary instruments
