The document defines monetary policy as the tool used by central banks to achieve macroeconomic objectives like growth and inflation control. It involves managing money supply and interest rates. The Reserve Bank of India is India's central bank and its Monetary Policy Committee formulates monetary policy through various direct and indirect tools. The key tools discussed are repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio, open market operations, and moral suasion. The objectives of Indian monetary policy are price stability, adequate credit flow, controlled credit expansion, and promotion of investment and exports.

1. Presented By:
Bhupesh Kr. Kaundin

2. Definition of 'Monetary Policy'
 Monetary Policy is the tool in the
hands of central bank in order to
achieve two objectives:-
 In order to facilitate Growth i.e.
GDP/ National Income growth.
 To control and regulate
inflation.
 Definition: Monetary policy is the
macroeconomic policy laid down by the
central bank. It involves management of
money supply and interest rate and is the
demand side economic policy used by the
government of a country to achieve
macroeconomic objectives like inflation,
consumption, growth and liquidity.

3. Difference between Monetary
Policy and Fiscal Policy.

4. Central Bank ?
 Meaning:-
 Central Bank is the supreme Monetary institution
which is at the apex of the monetary and banking
structure of a country.
 It also manages the currency and credit policy of
the country and functions as a banker to the
government.
 As per De Kock “a bank which constitutes the apex of
the monetary and banking structure of the country”
is know as Central Bank.
 In case of India “Reserve Bank of India” is the Central Bank of India.

5. Hkkjrh; fjtoZ cSad
"Reserve Bank of India"
India's Central Bank.
 Reserve Bank of India is
India’s central bank.
 It is the apex monetary
instituion which supervise,
regulates, control and
develops the monetary and
financial system of the
country.
 It was established on 1st April,
1935 under the Reserve Bank
of India Act, 1935.
 It was nationalized on
January 1, 1949.
New Central Office Building, Shahid
Bhagat Singh Rd, Fort, Mumbai,
Maharashtra 400001

6. Monetary Policy of India is
formulated by the Monetary
Policy Committee.

7. "Monetary Policy Committee"
 The Monetary Policy Committee of India is a committee
of the Reserve Bank of India that is responsible for fixing
the benchmark interest rate in India. The meetings of the
Monetary Policy Committee are held at least 4 times a year
and it publishes its decisions after each such meeting.
 The committee comprises six members - three officials of
the Reserve Bank of India and three external members
nominated by the Government of India. They need to
observe a "silent period" seven days before and after the
rate decision for "utmost confidentiality".
 The Governor of Reserve Bank of India is the
chairperson ex officio of the committee. Decisions are
taken by majority with the Governor having the casting
vote in case of a tie. The current mandate of the committee
is to maintain 4% annual inflation until March 31, 2021
with an upper tolerance of 6% and a lower tolerance of 2%.
 The committee was created in 2016 to bring transparency
and accountability in fixing India's Monetary Policy. The
monetary policy are published after every meeting with
each member explaining his opinions. The committee is
answerable to the Government of India if the inflation
exceeds the range prescribed for three consecutive
months.[2]

8. Members of MPC India

9. Types of Monetary Policy

10. OBJECTIVES OF MONETARY
POLICY
 Price stability
 Ensuring adequate flow of credit to the
productive sectors of the economy to support
economic growth
 Controlled expansion of bank credit
 Promotion of fixed investment
 Promotion of Exports and food Procurement
operations
 Deserved credit distribution
 To promote efficiency, deregulating interest rate etc.

11. Tools of Monetary Policy
The Reserve Bank’s Monetary Policy Department (MPD) formulates monetary
policy.
The Financial Markets Department (FMD) handles day-to-day liquidity
management operations.
There are several direct and indirect instruments that are used in the formulation
and implementation of monetary policy

12. Repo Rate
(Re-Purcahse Option Rate)
 Repo means that RBI is giving short term loans to
bank against government securities with a promise by
banks to repurchase securities after certain time at
specified amount.
 For injection of short term liquidity

13. Reverse repo
(Reverse Re-Purchase Option Rate.)
 It is the rate of interest at which the RBI borrows funds
from other banks in the short term.
 This is done by RBI selling:-
 Government bonds;
 Securities.
 Reverse repo means that banks park their short term
funds with RBI against government securities with a
promise by RBI to repurchase securities after certain
time at specified amount.
 RBI can reduce liquidity in the banking system by
increasing the rate at which it borrows from banks.

14. How does Reverse Repo Rate
Work?
 Hiking the repo and reverse repo rate ends up
reducing the liquidity ad pushes up interest rates.
 When RBI increases the Reverse Repo, it means that
now the RBI will provide extra interest on the money
which it borrows from the banks. An increase in
reverse repo rate means that banks earn higher returns
by lending to RBI. This indicates a hike in the deposit
rates.

15. Open market operation
 When there is excess of liquidity.
 RBI resorts to sale of G-secs. (Government Securities).
 To suck out rupees from system.
 On the other hands, when there is liquidity crunch in the
economy, RBI buys securities from the market, in order to
release liquidity.
 Hence, OMO can be defined as to the purchase and sale of
the Government Securities by RBI from/to market.
 Not well developed
 If Bank purchase – Credit supply decreases.
 If RBI purchase – Credit supply increases.

16. BANK RATE
 It is the rate at which the Reserve Bank is ready to buy
or rediscount bills of exchange or other commercial
papers. It also signals the medium-term stance of
monetary policy.
 This rate has been aligned to the MSF rate and, therefore,
changes automatically as and when the MSF rate changes
alongside policy repo rate changes.
 It is that minimum rate of interest at which RBI Provides
re-financing facility to commercial bank.
 Bank rate increases = Generally during Inflation= Dear
money policy
 Bank rate decrease=Generally during Recession=Cheap
money policy

17. CASH RESERVE RATIO
(CRR)
 Cash Reserve Ratio is the amount of funds that the banks are
bound to keep with Reserve Bank of India as a percentage
(proportion) of their Net Demand and Time Liabilities (NDTL)
 The share of net demand and time liabilities that banks must
maintain as cash balance with the Reserve Bank.
 Ratio of total Demand and Time Liabilities (DTL=total deposits with
bank) which bank has to keep with RBI at any given point of time.
 CRR increases = Credit squeeze
 CRR decreases = liberalization=credit expansion
 Assets of Banks= Loans
 Liabilities of Banks= Deposits
 Demand and Time Liabilities =Demand deposit (Current Account
& Saving Account) + Time deposit (fixed /recurring deposit)

18. Objective of CRR
 Main objective of CRR is to :-
 Ensure adequate liquidity in the financial system and
 enough solvency for the Banks.

19. STATUTORY LIQUIDITY RATIO (SLR)
 The share of net demand and time liabilities that banks
must maintain in safe and liquid assets, such as
government securities, cash and gold.
 = ratio of total deposit of bank which it has to maintain with
itself in liquid form i.e.
 Cash
 Gold
 Govt. securities
Purpose:
 It ensures Govt. with certain part of its finances i.e. banks buys
Govt. securities to fulfill its SLR obligations and Govt. receives
the money. Banks generally prefer this mode because it provides
interest to them .Hence their fund don’t sits idle.
 Prevent collapse of banks.

20. What all forms a part of SLR?
 SLR deposits includes:
 Cash,
 Gold reserves kept in the Bank,
 Balances with RBI,
 Net balance in Current Account &
 Investment in Government Securities (if any)
 SLR has to be maintained on a daily basis by every
bank.
 At present, the SLR is 21% (August 2016).

21. Difference between CRR and SLR
 CRR and SLR are the quantitative instruments of
Reserve Bank of India’s monetary policy.
 CRR indicates the quantum of cash that banks are
required to keep with the Reserve Bank (in their
premises) as a proportion of their net demand and
time liabilities (NDTL).
 SLR prescribes the amount of money that banks must
invest in securities issued by the government. This is
not kept with RBI but with banks themselves.

22. Qualitative Tools
 The Qualitative Instruments are also known as the
Selective Tools of monetary policy. These tools are
not directed towards the quality of credit or the use of
the credit. They are used for discriminating between
different uses of credit.
 These are those Tools through which the central Bank
not only controls the value of loans but also the
purpose for which these loans are assigned by the
commercial banks.

23. Moral Suasion.
 Moral suasion means persuasion and request.
 To arrest inflationary situation central bank persuades and requests the
commercial banks to refrain from giving loans for speculative and non
essential purpose.
 On the other hand, to counter deflation central bank persuades the
commercial banks to extend credit for different purpose.
 Under moral suasion, RBI issued periodical letters to bank to exercise
control over credit in general or advances against particular
commodities.
 Periodic discussions are held with authorities of commercial banks in
this respect.
 In India, from 1949 onwards the Reserve Bank has been successful in
using the method of moral suasion to bring the commercial banks to
fall in the line with its policies regarding credit.

24. Rationing of Credit.
 Rationing of credit is a method by which the Reserve
bank seeks to limit the maximum amount of loans and
advances and also in certain cases fix ceiling for
specific categories of loans and advances.
 RBI also makes credit flow to certain priority or weaker
sectors by charging concessional rates of interest. This
is at times also referred to as Priority Sector Lending.

25. Regulation of Consumer Credit
 Now –a-days, most of the consumer durables like cars,
Televisions and Laptops etc. are available on installment basis
financed through bank credit.
 Such credit made available by commercial banks for the
purchase of consumer durables is know as consumer credit.
 If there is excess demand for certain consumer durables leading
to their high prices, central bank can reduce consumer credit by
doing the following:-
 (a) increasing down payment, and
 (b) reducing the number of installments of repayment of such credit.
 (c) Alternatively, if there is deficient demand for certain specific
commodities causing deflationary situation, central bank can increase
consumer credit by:-
 (a) reducing down payment.
 (b) increasing the number of installments of repayment of such credit.

26. Direct Action
 This method is adopted when a commercial bank does
not co-operate with the central bank in achieving its
desirable objectives. Direct action may be taken in
many forms:
 Central Banks may charge a penal rate of interest over and
above the bank rate upon the defaulting banks.
 Central Bank may refuse to rediscount the bills of those banks
which are not following its directives.
 Central Bank may refuse to grant further accommodation to
those banks whose borrowings are in excess of their capital
and reserve.

27. Margin Requirements
 Generally commercial banks give loan against ‘stock or
securities’.
 While giving loans against stocks or securities they
keep margin.
 Margin is the difference between the market value of a
security and its maximum loan value.
 Let us assume, a commercial bank grants a loan of Rs.
8000 against a security worth Rs. 10,000. Here, margin
is Rs. 2000 or 20%.

28. “Earth provides enough to
satisfy every man's
needs, but not every
man's greed.”
― Mahatma Gandhi