The part of the economic policy which regulates the
level of money in the economy in order to achieve
In INDIA,RBI controls the monetary policy. It is
announced twice a year, through which
RBI,regulate the price stability for the economy.
1.slack season policy
2.Busy season policy
Maximum feasible output.
High rate of growth.
Greater equality in the distribution of income
Healthy balance in balance of
Selective credit control
They are distinguishable from quantitative tools
by the fact that they are directed towards particular
uses of credit and merely to total volume
Important selective control measures are:
Rationing of credit.
Changes in margin requirements.
Regulation of consumer credit.
1.Open market operations:
It refers to the purchase or
sale by the central bank of any securities in which it
deals, such as the government securities, banker’s
acceptances or foreign exchange.
When central bank offers securities for sale, it intends
to contract money supply and credit.
When the central bank pursuing the expansionary
monetary policy will buy securities in the market, so
that supply and credit capacity will be increased.
A repurchase agreement or ready forward
deal is a secured short-term (usually 15
days) loan by one bank to another against
Legally, the borrower sells the securities to
the lending bank for cash, with the
stipulation that at the end of the borrowing
term, it will buy back the securities at a
slightly higher price, the difference in price
representing the interest.
Reverse repo rate is the rate that RBI
offers the banks for parking their funds
with it. Reverse repo operations suck out
liquidity from the system.
Reverse Repo rate
Bank rate is the minimum rate at which the
central bank provides loans to the commercial
banks. It is also called the discount rate.
Dear money policy:
Bank rate inc
interest rate inc
will be less profitable
results contraction of
Near money policy:
Bank rate dec
interest rate low
will be more profitable
results expansion of
The central bank of a country is empowered to
determine within statutory limits, the cash reserve
requirements of the commercial banks.
Statutory liquid ratio:
Bank has to keep portion of
total deposits with itself in liquid assets.
Cash reserve ratio:
The percentage of bank’s
deposits which they must keep as cash with RBI.
It refers to the ways in which the budgetary gap is
However, in developing countries, resort is made to
the central bank to cover the deficit. The central bank
merely release more notes and these are then put into
circulation on behalf of the government.
Therefore in these countries, deficit financing is
tantamount to printing more currency( creation of