Monetary policy controls the supply of money in an economy through interest rates and other tools to achieve objectives like price stability and low unemployment. It can be expansionary by lowering rates to boost the economy during recessions, or contractionary by raising rates to curb inflation. In India, the Reserve Bank of India executes monetary policy using tools like the bank rate, cash reserve ratio, statutory liquidity ratio, repo rate, and reverse repo rate to influence the money supply and interest rates. As of October 2012, key rates like the repo rate were at 8% while inflation was at 7.5%.

1. MONETARY POLICY

2. Monetary policy is the process by which the monetary
authority of a country controls the supply of money, often
targeting a rate of interest to attain a set of objectives oriented
towards the growth
and stability of the economy.

3. Goals – to maintain relatively stable prices and low
unemployment

4. Monetary policy is referred to as either being an expansionary policy,
or a contractionary policy.
Expansionary policy increases the total
supply of money in the economy rapidly
Contractionary policy decreases the total
money supply, or increases it slowly.

5. Expansionary policy is used to
combat unemployment in a recession by
lowering interest rates
Contractionary policy involves raising
interest rates to combat inflation.

6. In every country a special institution exists which
has the task of executing the monetary policy

7. TOOLS OF MONETARY POLICY IN INDIA
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BANK RATES
CRR
SLR
REPO RATE

8. BANK RATE
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Bank Rate is the rate at which
RBI allows finance to commercial
banks.
Bank Rate is a tool, which central
bank uses for short-term
purposes.
Any upward revision in Bank Rate
by central bank is an indication
that banks should also increase
deposit rates as well as Prime
Lending Rate.
This any revision in the Bank rate
indicates could mean more or
less interest on your deposits and
also an increase or decrease in
your EMI.

9. CRR
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RBI uses CRR either to drain
excess liquidity or to release
funds needed for the economy
from time to time.
Increase in CRR means that banks
have less funds available and
money is sucked out of
circulation.
Thus we can say that this serves
duel purposes i.e. it not only
ensures that a portion of bank
deposits is totally risk-free, but
also enables RBI to control
liquidity in the system, and
thereby, inflation by tying the
hands of the banks in lending
money.

10. SLR
• SLR stands for
Statutory Liquidity
Ratio.
• This term indicates the
minimum percentage of
deposits that the bank
has to maintain in form
of gold, cash or other
approved securities.

11. REPO AND REVERSE REPO RATE
REPO RATE
REVERSE REPO RATE
• It is the rate at which the RBI
lends shot-term money to the
banks. When the repo rate
increases borrowing from RBI
becomes more expensive.
• Therefore, we can say that in
case, RBI wants to make it
more expensive for the banks
to borrow money, it increases
the repo rate; similarly, if it
wants to make it cheaper for
banks to borrow money, it
reduces the repo rate
• It is the rate at which banks
park their short-term excess
liquidity with the RBI. The RBI
uses this tool when it feels
there is too much money
floating in the banking
system.
• An increase in the reverse
repo rate means that the RBI
will borrow money from the
banks at a higher rate of
interest. As a result, banks
would prefer to keep their
money with the RBI

12. Second Quarter Review of Monetary
Policy 2010-11
• The Bank Rate has been retained at 6.0 per cent.
• It has been decided to increase the repo rate
under the liquidity adjustment facility (LAF) by
25 basis points from 6.0 per cent to 6.25 per cent
with immediate effect.
• It has been decided to increase the reverse repo
rate under the LAF by 25 basis points from 5.0
per cent to 5.25 per cent with immediate effect.
• The cash reserve ratio (CRR) of scheduled banks
has been retained at 6.0 per cent of their net
demand and time liabilities.

13. Expected Outcomes
• Sustain the anti-inflationary thrust of recent
monetary actions and outcomes in the face of
persistent inflation risks.
• Rein in rising inflationary expectations, which
may be aggravated by the structural nature of
food price increases.
• Be moderate enough not to disrupt growth.

14. THANK YOU !

15. As of 31 October 2012, the key indicators are
Indicator
Current rate
Inflation
7.5%
Bank rate
9%
CRR
4.25%
SLR
23%
Repo rate
8%
Reverse repo rate
7%

16. Policy rates, Reserve ratios, lending, and
deposit rates as of 30, October, 2012
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Bank Rate9.00%
Repo Rate8.00%
Reverse Repo Rate7.00%
Cash Reserve Ratio (CRR)4.25%
Statutory Liquidity Ratio (SLR)23.0%
Base Rate9.75%–10.50%
Reserve Bank Rate4%
Deposit Rate8.50%–9.00%