This document discusses monetary policy and its instruments. It defines monetary policy as the process by which a central bank controls the supply of money in order to promote economic growth and stability. The key instruments of monetary policy discussed are: open market operations, bank rate/discount rate, cash reserve ratio, statutory liquidity ratio. Quantitative measures include open market operations, bank rate, cash reserve ratio while qualitative measures comprise selective credit controls. The effectiveness of these tools depends on the level of monetization and development of the capital market in an economy.

1. Presented By
Parveen Kumar Nimbrayan

2. Introduction
Definition and Scope
Objective
 Instruments of Monetary Policy
• Quantitative Measures
• Qualitative Measures

3. Widely used tools of economic control and
regulations.
Major aspects
• Meaning and scope
• Instruments and target variables
• Role in achieving macroeconomic goals.
• Effectiveness and limitations.

4.  Monetary policy is the 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.
 Generally Central bank to achieve
macroeconomic goals.
 Depends by and large on two factors.
• The level of monetized economy.
• Development of the capital market.

5.  Encompasses the entire economic activities.
 Economic transactions carried out with
money as medium.
 Works by changing the general price level.
 Change in the supply of money affects the
level of economic activities through price level
other instruments of monetary control (BR
and CRR) work through capital market.

6.  Developed capital market – features: -
• Large number of financially strong commercial banks,
finance institutions, credit organizations, and short term bill
market.
 A major part of financial transactions are routed
through the capital markets.
 The commodity sector is highly sensitive to the
changes in the capital market.
 Therefore, it is necessary that capital submarkets
have strong financial links with the commercial
banks.

7. Growth
Employment
Stability of price and foreign exchange
BOP equilibrium.

8. Classified under two categories:
• Quantitative measures or the Traditional
measures of Monetary control.
• Qualitative or Selective credit controls

9. They are :
• Open Market Operations.
• Discount Rate or Bank Rate.
• Cash Reserve Ratio (CRR). –
SLR

10.  Purchase and sale of eligible securities by the
central bank.
 At inflation and boom, the central bank sells
securities in the open market and withdraws
the surplus money from circulation.
 The central bank buys securities and injects
additional money into circulation during
deflation and depression.

11.  It is the rate at which the central bank rediscounts
first class bills.
 During the period of inflation central bank raises
bank rate.
• Followed by rise in the interest rate
• Will discourage borrowings and encourage savings.
 During the period of deflation and depression the
central bank lowers the bank rate.
• Consequent fall in the interest rate encourages borrowings.

12. 2012-13
8.50
2012
June
9.00
July
9.00
2013
June
8.25
July
10.25

13.  Every commercial bank is required to keep with
central bank a certain percentage of its deposits
reserve ratio.
 When reserve ratio is raised, the commercial
banks are forced to send more cash to the central
bank cash resources of Commercial banks.
• Less
• Lending capacity automatically reduced.
 When RR is lowered
• The cash resources of banks increase
• They lend more

14. 2012-13
• 4.00
2012
• June
4.75
• July
4.75
2013
• June
4.00
• July
4.00

15. SLR- Commercial Banks has to keep a portion of total
deposits with itself in liquid assets.
The objectives of SLR are:
 To restrict the expansion of bank credit.
 To augment the investment of the banks in
Government securities.
 To ensure solvency of banks. A reduction of
SLR rates looks eminent to support the credit
growth in India.

16. Value and Formula
The quantum is specified as some
percentage of the total demand and time
liabilities ( i.e. the liabilities of the bank
which are payable on demand anytime,
and those liabilities which are accruing in
one months time due to maturity) of a
bank.
 SLR Rate = Total Demand/Time Liabilities x 100%

17. 2012-13
23.00
2012
June
24.00
July
24.00
2013
June
23.00
July
23.00

18. RBI generally uses 3 kinds of selective
controls on credits:
A. Minimum margins for lending against specific
securities.
B. Ceiling on the amounts of credit for certain
purposes.
C. Discriminatory rate of interest charged on certain
types of advances.