The document discusses various aspects of monetary policy in India including the objectives, instruments, and highlights of the Reserve Bank of India's monetary policy for 2011-2012 which increased key policy rates like the repo rate and reverse repo rate while also raising the cash reserve ratio. It also outlines some limitations of monetary policy like time lags in implementation and issues related to forecasting economic conditions.

1. WELCOME
Y.SINDHURA DEEPIKA
M.SANDEEP
K.S.R.M ENGINEERING COLLEGE
KADAPA.

2. Are R.B.I Policies
Suitable For Growth
Of Indian Economy?

3. Reserve Bank Of India
 The Central Bank Of India -RBI.
 Established In 1935 With a Share Capital Of Rs. 5 crores on the basis
of the Hilton Young Commission.
 The Share Capital was Divided into Rs. 100 each
fully paid up which was entirely owned by private shareholders in the
beginning.
 RBI was nationalised in 1949.
 The govt. held shares of normal value of Rs. 2,20000.

4. Monetary
Policy
FEDERAL RESERVE BANK OF THE U.S.

5. What is Monetary Policy?
 Shaw defines monetary policy as “any conscious
action undertaken by the monetary authorities to
change the quantity, availability or cost.., of money.
 Monetary policy is essentially a programme of
action undertaken by the monetary authorities
generally the central bank, to control and regulate
the supply of money with the public and the flow of
credit with a view to achieving the objectives of
general economic policy

6. Objectives Of Monetary Policy
 Maintain price Stability.
 Flow of credit to the productive sectors of the economy.
 Stability for the national currency.
 Growth in employment and income.
 To promote and encourage economic growth in the country.

7. INSTRUMENTS OF MONETARY
POLICY
SLR
Open market
Bank rate QUANTITATIVE
operations
Cash
Reserve
Ratio

8. Bank Rate policy
 Traditional approach:- Bank rate
means on which central bank
discounts and rediscount the eligible
bills.
 Today’s approach:- Bank rate means
the minimum rate on which central
bank provides financial
accommodation to commercial bank in
the discharge of its function as the
lender of the last resort. Present rate
is 6%.

9. Increase in bank rate Decrease in bank rate
 Increase in bank rate  Decrease in bank rate
charge by the central bank charge by the central bank
on its advance to on its advance to
commercial bank. commercial bank.
 Commercial bank decrease
 Commercial bank increase the rate of interest on their
the rate of interest on their loan.
loan.
 Demand for the credits and
 Demand for the credits and loan increase.
loan decrease.  Flow of the money increase
 Flow of the money in the economy
decrease in the economy  Use in depression situation
 Use in inflationary situation
Effect of Bank rate

10. Open Market operation
Its include the sales and purchase by the
central bank of ….
 Assets
 Foreign exchange
 Gold
 Government securities
 Company securities

11. In the inflationary situation In the depressionary situation
 Central bank decrease  Central bank increase
the money supply. the money supply.
 Central bank sale out the  Central bank purchase
securities to commercial the securities from the
bank and control money commercial bank.
supply.
Use of Open Market operation

12. Cash Reserve Ratio
 Commercial bank has to keep a
certain percentage of his deposits with
central bank.
 It control the cash flow in economy.
 It keeps changes in monetary policy
framed by central bank of a country.
Presently it is 6%.

13. STATUARY LIQUIDITY
RATIO
 Commercial bank is to keep a certain
percentage of his deposit as liquid
asset.
 It control the cash flow in economy.
 It keeps changes in monetary policy
framed by central bank of a country. At
present it is 24%.

14. In Inflationary situation In Depressionary situation
o Increased the o Decreased the
percentage of cash percentage of cash
reserve ratio and reserve ratio and
Statutory liquidity ratio Statutory liquidity
o It reduces the supply ratio
of money in an economy o It increases the supply of
money in an economy
Use of C.R.R. & S.L.R

16. Qualitative Instruments
 Credit Rationing:
Under this two measures are adopted:
• Imposition of upper limits on the credit available to large
industries and firms.
• Charging a higher interest rate on bank loans beyond a certain
limit.
 Change In Lending Margins:
 The banks provide loans only upto a certain percentage of the
value of the mortgaged property.
 The gap between the value of the mortgaged property and
amount advanced is called ‘lending margin’.

17.  Moral Suasion:
• The moral suasion is a method of persuading and
convincing the commercial banks to advance credit in
accordance with the directive of the central bank in the
economic interest of the country.
 Direct controls:
• Where all other methods prove ineffective, the
monetary, authorities resort to direct control measures
with clear directive to the banks carry out their lending
activity in a specified manner.

19. Highlights of Monetary Policy
2011-2012
 The Reserve Bank announces the following policy
measures:
 The Bank Rate has been retained at 6.0 percent.
 It has been decided to increase the repo rate from
8.25 per cent to 8.50 per cent
 The reverse repo rate is increased from 7.25 per
cent to 7.50 per cent.
 It has been decided to increase the cash reserve
ratio (CRR) of scheduled banks by 25 basis points
from 5.75 per cent to 6.0 per cent.
 The SLR is announced 24%.

20. Limitations Of Monetary Policy
 The time lag :
• The first and the most important limitation in the
effective working of monetary policy is the time lag.
i.e. time taken in chalking out the policy action, its
implementation and working time.
 Problem in forecasting :
• The formulation of an appropriate monetary policy
requires a reliable assessment of the magnitude of
the problem-recession or inflation- as it helps in
determining the appropriate policy measures.

21.  Non-banking Financial Intermediaries:
• The structural change in the financial market has also
reduced the scope of effectiveness of monetary policy.
 Under Development of money and capital markets :
• The effectiveness of monetary policy in less developed
countries is reduced considerably because of the
underdeveloped character of their capital and money
markets.