This document provides an overview of monetary policy in India. It discusses the objectives of monetary policy as rapid economic growth, price stability, exchange rate stability, balance of payments equilibrium, and full employment. It describes various monetary measures used by the Reserve Bank of India, including bank rate, cash reserve ratio, statutory liquidity ratio, open market operations, repo rate, and reverse repo rate. Selective credit control measures and limitations of monetary policy are also summarized.

1. GROUP 1
 ANNAPURNA
 JUHI GUPTA
 LALIT KUMAR
 ANIRUDH T.
 VENKATA CHINNA
 SRINIVAS C.V

2. MONETARY POLICY
It is a process by which the monetary authority of a country
controls the supply of money, often targeting a rate
of interest for the purpose of promoting economic growth and
stability.

3. OBJECTIVES
 Rapid Economic Growth
 Price Stability
 Exchange Rate Stability
 Balance of Payments (BOP) Equilibrium
 Full Employment

4. SCOPE Of MONETARY POLICY
 Level of Monetization of the economy
 Level of Development of the Financial Market

5. MONETIZED ECONOMY
 Money as Medium of exchange.
 Monetary policy works by changing supply of and demand for
money and general price level.
 Effecting economic activities– Production, consumption, savings
and investment.
 Influences all economic variables– GDP, I-S, Employment, Price
Level, Foreign Trade and BOP

6. CAPITAL MARKET
 Monetary Policy affects economic activity through changes in
capital market.
 Financial transactions are routed through the banks and
financial institutions.
 Some instruments like (Bank Rate and CRR) work through
Capital market.

7. FORMS OF MONETARY POLICY
 Expansionary policy :
Policy makers use this policy to increase the money supply in
the system by lowering the interests rates.
 Contractionary policy:
Here the cost of money is made dearer by increasing the rate of
interest which in turn helps in reducing the money in the
system and combat inflation.

8. MONETARY MEASURES
 Bank Rate
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio
 Open Market Operations (OMO)
 The Repo Rate

9. BANK RATE
 It is the rate at which the Central Bank (RBI) lends
money to the commercial bank.
 Rediscounts the bills of exchange presented by the
Commercial Bank.
-> Current Bank rate in India is 6%

10. CASH RESERVE RATIO
 It is the percentage of total deposit in which Commercial
Banks are required to maintain in the form of cash reserves.
 When the RBI feels that the money supply is increasing and
causing an upward pressure on inflation, the RBI has the option
of increasing the CRR thereby reducing the deposits available
with banks to make loans and hence reducing the money
supply and inflation.
 Current CRR rate = 6.0%

11. STATUTORY LIQUIDITY
RATIO(SLR)
 RBI imposed SLR to control and regulate the credit creation by
the banks for the private sector and the availability of finance
to the Government.
 The RBI can increase the SLR rate to absorb the excess money
in the economy, to contain inflation in favor of the consumers
interest.
 Under SLR scheme the commercial banks are required by
statute to maintain a certain percentage of there daily demand
and timed deposits in the form of liquid assets(excess
reserves)– unencumbered government securities.
 Current SLR rate = 24%

12. REPO RATE
 Repo rate is the rate at which our banks borrow rupees from
Central Bank.
 Whenever the banks have any shortage of funds they can
borrow it from RBI.
 Here, there is a sale of security to RBI on an agreement to “
Repurchase” it at a future date at predetermined price.
 Current Repo Rate = 8.0%
URL
:
http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid
=24786

13. REVERSE REPO RATE
 The rate at which RBI borrows money from the Banks(or
banks lend money to RBI).
 RBI uses this tool when it feels that there is too much money
floating in the banking system.
 Current Reverse Repo Rate : 7%

14. SELECTIVE CREDIT CONTROL
MEASURES
 They lead to expansion or to contraction of the total credit as
intended by the monetary authorities.
Common Selective Controls are:
 Credit Rationing
 Change in Lending Margins
 Moral Suasion
 Direct Control

15. CREDIT RATIONING
 It refers to the situation where lenders limit the supply of
additional credit to borrowers who demand funds, even if the
latter are willing to pay higher interest rates.
Generally two measures are adopted:
 Imposition of upper limits on the credit available to well
developed industries and large scale firms.
 Charging a higher or progressive interest rate on bank loans
beyond a certain limit.

16. CHANGE IN LENDING MARGINS
 It is the gap between the value of the mortgaged property and
the amount advanced.
 RBI increases lending margins to decrease bank credit.

17. MORAL SUASION
 It is a method of persuading and convincing the commercial
banks to advance credit in accordance with the directives of the
central bank in overall economic interest of the country.
 The central bank also writes letters and hold meetings with the
banks on money and credit matters.

18. DIRECT CONTROL
 It is used as a last resort in case other methods prove
ineffective.
 In this method the monetary authorities with clear directive to
carry out their lending activity in a specified manner.

19. LIMITATIONS OF MONETARY
POLICY
1. Time Lag:
It is referred to as the time taken in chalking the policy action
its implementation and response time.
2 types :
 Inside lag
 Out side lag

20. 2. Problems in Forecasting :
 For the formulation of monetary policy the magnitude of the
problem i.e. inflation or recession should be properly assessed
for determining the appropriate policy.
 The low degree of reliability of forecasting , prediction of the
out come of a policy action and formulation of appropriate
monetary policy has remained an extremely difficult task.

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