Monetary policy


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Monetary policy

  2. 2. MONETARY POLICY It is a 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.
  3. 3. OBJECTIVES  Rapid Economic Growth  Price Stability  Exchange Rate Stability  Balance of Payments (BOP) Equilibrium  Full Employment
  4. 4. SCOPE Of MONETARY POLICY  Level of Monetization of the economy  Level of Development of the Financial Market
  5. 5. MONETIZED ECONOMY  Money as Medium of exchange.  Monetary policy works by changing supply of and demand for money and general price level.  Effecting economic activities– Production, consumption, savings and investment.  Influences all economic variables– GDP, I-S, Employment, Price Level, Foreign Trade and BOP
  6. 6. CAPITAL MARKET  Monetary Policy affects economic activity through changes in capital market.  Financial transactions are routed through the banks and financial institutions.  Some instruments like (Bank Rate and CRR) work through Capital market.
  7. 7. FORMS OF MONETARY POLICY  Expansionary policy : Policy makers use this policy to increase the money supply in the system by lowering the interests rates.  Contractionary policy: Here the cost of money is made dearer by increasing the rate of interest which in turn helps in reducing the money in the system and combat inflation.
  8. 8. MONETARY MEASURES  Bank Rate  Cash Reserve Ratio (CRR)  Statutory Liquidity Ratio  Open Market Operations (OMO)  The Repo Rate
  9. 9. BANK RATE  It is the rate at which the Central Bank (RBI) lends money to the commercial bank.  Rediscounts the bills of exchange presented by the Commercial Bank. -> Current Bank rate in India is 6%
  10. 10. CASH RESERVE RATIO  It is the percentage of total deposit in which Commercial Banks are required to maintain in the form of cash reserves.  When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation.  Current CRR rate = 6.0%
  11. 11. STATUTORY LIQUIDITY RATIO(SLR)  RBI imposed SLR to control and regulate the credit creation by the banks for the private sector and the availability of finance to the Government.  The RBI can increase the SLR rate to absorb the excess money in the economy, to contain inflation in favor of the consumers interest.  Under SLR scheme the commercial banks are required by statute to maintain a certain percentage of there daily demand and timed deposits in the form of liquid assets(excess reserves)– unencumbered government securities.  Current SLR rate = 24%
  12. 12. REPO RATE  Repo rate is the rate at which our banks borrow rupees from Central Bank.  Whenever the banks have any shortage of funds they can borrow it from RBI.  Here, there is a sale of security to RBI on an agreement to “ Repurchase” it at a future date at predetermined price.  Current Repo Rate = 8.0% URL : =24786
  13. 13. REVERSE REPO RATE  The rate at which RBI borrows money from the Banks(or banks lend money to RBI).  RBI uses this tool when it feels that there is too much money floating in the banking system.  Current Reverse Repo Rate : 7%
  14. 14. SELECTIVE CREDIT CONTROL MEASURES  They lead to expansion or to contraction of the total credit as intended by the monetary authorities. Common Selective Controls are:  Credit Rationing  Change in Lending Margins  Moral Suasion  Direct Control
  15. 15. CREDIT RATIONING  It refers to the situation where lenders limit the supply of additional credit to borrowers who demand funds, even if the latter are willing to pay higher interest rates. Generally two measures are adopted:  Imposition of upper limits on the credit available to well developed industries and large scale firms.  Charging a higher or progressive interest rate on bank loans beyond a certain limit.
  16. 16. CHANGE IN LENDING MARGINS  It is the gap between the value of the mortgaged property and the amount advanced.  RBI increases lending margins to decrease bank credit.
  17. 17. MORAL SUASION  It is a method of persuading and convincing the commercial banks to advance credit in accordance with the directives of the central bank in overall economic interest of the country.  The central bank also writes letters and hold meetings with the banks on money and credit matters.
  18. 18. DIRECT CONTROL  It is used as a last resort in case other methods prove ineffective.  In this method the monetary authorities with clear directive to carry out their lending activity in a specified manner.
  19. 19. LIMITATIONS OF MONETARY POLICY 1. Time Lag: It is referred to as the time taken in chalking the policy action its implementation and response time. 2 types :  Inside lag  Out side lag
  20. 20. 2. Problems in Forecasting :  For the formulation of monetary policy the magnitude of the problem i.e. inflation or recession should be properly assessed for determining the appropriate policy.  The low degree of reliability of forecasting , prediction of the out come of a policy action and formulation of appropriate monetary policy has remained an extremely difficult task.
  21. 21. THANK YOU