This presentation explains various monetary instruments being adopted by the Reserve Bank of India. It also shows their impact on stock market. It also show the statistic trend of inflation, repo rate, reverse repo rate, etc in India.

1. -Garima Gupta

2. • Macroeconomic policy- by the monetary authority of the country.
• Management of money supply and interest rate
• Demand-side economic policy used by the govt. of a country to achieve macroeconomic
objectives like inflation, consumption, growth and liquidity.
• In case of Indian economy, RBI is the sole monetary authority which decides the supply of
money in the economy.
• The RBI implements the monetary policy through open market operations, bank rate policy,
reserve system, credit control policy, moral persuasion and through many other
instruments.
• Increasing money supply and reducing interest rates indicate an expansionary policy. The
reverse of this is a contractionary monetary policy.

3. Central banks have three monetary policy
objectives:-
• To manage Inflation
• To reduce unemployment
• To promote moderate long-term interest rates.

4. 1. Price Stability
2. Controlled Expansion Of Bank Credit
3. Promotion of Fixed Investment
4. Restriction of Inventories
5. Promotion of Exports and Food Procurement Operations
6. Desired Distribution of Credit
7. Equitable Distribution of Credit
8. To Promote Efficiency
9. Reducing the Rigidity

5.  Monetary policy instruments are the various tools that a central bank can use to influence
money market and credit conditions and pursue its monetary policy objectives. Various
instruments are:
 Repo Rate
 Reverse Repo Rate
 Liquidity Adjustment Facility (LAF)
 Marginal Standing Facility (MSF)
 Corridor
 Bank Rate
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio (SLR)
 Open Market Operations (OMOs)
 Market Stabilisation Scheme (MSS)

6. THE INSTRUMENTS OF MONETARY POLICY AFFECT THE LEVEL OF AGGREGATE
DEMAND THROUGH THE SUPPLY OF MONEY, COST OF MONEY AND
AVAILABILITY OF CREDIT.
THEY ARE ALSO CALLED AS “WEAPONS OF MONETARY POLICY”

7. •Traditional measures of monetary control
•Affect the entire credit market in the same direction
•Impact on all the sectors of the economy is uniform
•Does not take into consideration the objectives of
credit control.
They include:
1. Open Market Operations
2. Bank Rate or Discount Rate
3. Cash Reserve Ratio

8. • The sale and purchase of securities in the money market by
the central bank of the country.
• When prices start rising, the central bank sells securities. The
reserves of commercial banks are reduced and they are not in a
position to lend more to the business community or general
public. Further investment is discouraged and the rise in prices
is checked.
• When recessionary forces start in the economy, the central
bank buys securities. The reserves of commercial banks are
raised so they lend more to business community and general
public. It further raises Investment, output, employment,
income and demand in the economy hence the fall in price is
checked.

9. • Minimum lending rate of the central bank at which it rediscounts
first class bills of exchange and government securities held by the
commercial banks.
• When there is inflation, central bank raises the bank rate so
borrowing from it becomes costly and commercial banks borrow
less money from it. The commercial banks, in reaction, raise
their lending rates. There is contraction of credit and prices are
checked from rising further.
• When prices are depressed, the central bank lowers the bank
rate. It is cheap to borrow from the central bank on the part of
commercial banks. The latter also lower their lending rates.
Investment is encouraged and followed by rise in Output,
employment, income and demand and the downward movement
of prices is checked.

10. Under this method, CRR and SLR are two main deposit ratios, which
reduce or increase the idle cash balance of the commercial banks.
Every bank is required by law to keep a certain percentage of its
total deposits in the form of a reserve fund in its vaults and also a
certain percentage with the central bank.
When prices are rising, the central bank raises the reserve ratio.
Banks are required to keep more with the central bank. Their
capital is reduced and they lend less. The volume of investment,
output and employment are adversely affected.
When the reserve ratio is lowered, the capital of commercial banks
are raised. They lend more and the economic activity is favourably
affected.

11. The central bank uses a Marginal Standing Facility
(MSF), Liquidity Adjustment Facility(LAF), Corridor,
Market Stabilization Scheme to control and regulate the
money supply in the economy.
The Repo Rate is the rate at which commercial banks
borrow from RBI while the Reverse Repo Rate is the rate
at which RBI borrows from the commercial banks
against the government securities.Policy Repo Rate 5.15%
Reverse Repo Rate 4.90%
Marginal Standing Facility Rate 5.40%
Bank Rate 5.40%
CRR 4%
SLR 18.50%

12. Marginal Standing facility
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 at a penal rate of interest. This provides
a safety valve against unanticipated liquidity shocks to the banking system.
LIQUIDITY ADJUSTMENT FACILITY
The LAF consists of overnight as well as term repo auctions. Progressively, the
Reserve Bank has increased the proportion of liquidity injected under fine-tuning
variable rate repo auctions of range of tenors. The aim of term repo is to help
develop the inter-bank term money market, which in turn can set market based
benchmarks for pricing of loans and deposits, and hence improve transmission of
monetary policy.

13. CORRIDOR
The MSF rate and reverse repo rate determine the corridor for the
daily movement in the weighted average call money rate.
Market Stabilisation Scheme
(MSS)
This instrument for monetary management was introduced in 2004.
Surplus liquidity of a more enduring nature arising from large capital
inflows is absorbed through sale of short-dated government
securities and treasury bills. The cash so mobilised is held in a
separate government account with the Reserve Bank.

14. • The credit objectives under this category may include rationing the
credit, directing the flow of credit from least important sectors to the
most important sectors, controlling a speculating tendency based on the
availability of bank credit.
• When there is brisk speculative activity in the economy or in particular
sectors in certain commodities and prices start rising, the central bank
raises the margin requirement on them. Thus, these objectives are very
well served by the selective control methods.
• It includes:-
1. Credit Rationing
2. Change in Lending Margins
3. Moral Suasion

15. Change in Lending Margin:
The result is that the borrowers are given less money in loans
against specified securities.
For instance, raising the margin requirement to 70% means that the
pledger of securities of the value of Rs 10,000 will be given 30% of their
value, i.e. Rs 3,000 as loan. In case of recession in a particular sector, the
central bank encourages borrowing by lowering margin requirements.
Moral Suasion:
Under this method RBI urges to commercial banks to help in controlling
the supply of money in the economy.

16. •Section 45ZB of the amended RBI Act, 1934 provides for an
empowered six-member monetary policy committee (MPC).
•Under the amended RBI Act, the monetary policy making is as under:
•The MPC is required to meet at least four times in a year.
•The quorum for the meeting of the MPC is four members.
•Each member of the MPC has one vote, and in the event of an equality of votes, the Governor
has a second or casting vote.
•The resolution adopted by the MPC is published after conclusion of every meeting of the MPC in
accordance with the provisions of Chapter III F of the Reserve Bank of India Act, 1934.
•On the 14th day, the minutes of the proceedings of the MPC are published which include:
a. the resolution adopted by the MPC;
b. the vote of each member on the resolution, ascribed to such member; and
c. the statement of each member on the resolution adopted.
•Once in every six months, the Reserve Bank is required to publish a document called the
Monetary Policy Report to explain:
a. the sources of inflation; and
b. the forecast of inflation for 6-18 months ahead.
Open and Transparent Monetary Policy
Making:

17. INFLATION RATE IN INDIA: TREND

18. REPO & REVERSE REPO RATES

19. SLR & CRR:

20.  By signalling lower rates,
the RBI brings down the
cost of capital.
 Companies are able to
reduce their financial risk
when rates are cut.
 Monetary policy also
signals liquidity and this is
the key to equity markets.

21. • So it can be concluded that the implementation of the monetary
policy plays a very prominent role in the development of a
country.
• It’s a kind of double edge sword, if money is not available in the
market as the requirement of the economy, the investors will
suffer (investment will decline in the economy) and on the other
hand if the money is supplied more than its requirement then the
poor section of the country will suffer because the prices of
essential commodities will start rising.