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Monetary policy
- 1.
- 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 DEFINITIONOF 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 MONETARYPOLICY 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 MONETARYPOLICY 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 MONETARYPOLICY 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 ANDRESERVE 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 MONETARYPOLICY 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 MONETARYPOLICY 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 MONETARYPOLICY 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 MONETARYPOLICY 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 MONETARYPOLICY 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 aneffective 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.