Monetary policy
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The document discusses monetary policy in India and its objectives, instruments, and challenges. It explains that monetary policy aims to maintain price stability and economic growth through controlling money supply and credit in the economy using various tools. The key tools discussed are open market operations, cash reserve ratio, statutory liquidity ratio, and repo and reverse repo rates. It also outlines the objectives of monetary policy as price stability, economic growth, and managing interest rates and foreign exchange. Some challenges to effective monetary policy are the non-monetized sector and lack of coordination with fiscal policy.
![Indicator Current rate
Inflation 7.50
Bank rate 6.75% [11]
CRR 4.000%
SLR 20.50%
Repo rate 6.25% [12]
Reverse repo rate 5.75%
Marginal Standing facility rate 6.75%[13]
As of 15 January 2017, the key indicators are](https://image.slidesharecdn.com/monetarypolicy-170411125738/85/Monetary-policy-15-320.jpg)
Monetary policy
- 1. Ravi Kr. Vishwakarma MBA Mangalmay Institute Of Management and Technology
- 2. Monetary Policy Instruments Role & Objectives Inflation
- 3. Monetary policy is the process by which monetary authority of a country , generally central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth
- 4. Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.
- 5. The RBI aims to achieve its objectives of economic growth and control of inflation through various methods. General/ quantitative methods Selective/ qualitative methods
- 6. These methods maintain and control the total quantity or volume of credit or money supply in the economy. Open Market Operations Open market operations indicate the buying/ selling of govt. securities in the open market to balance the money supply in the economy . The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow. Open market operation makes bank rate policy effective and maintains stability in government securities market.
- 7. Cash reserve ratio (CRR) Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the liquidity in the system and vice versa. RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narsimham committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of 4 October 2016, the CRR is 4.00 percent. Bank Rate Policy The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing funds or loans to the banking system. This banking system involves commercial and co-operative banks, Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial institutes
- 8. Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand assets is termed as the Statutory liquidity ratio There was a reduction of SLR from 38.5% to 25% because of the suggestion by Narsimham Committee. The current SLR is 20.50%
- 9. Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral. i. Repo Rate: Repo rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive. ii. Reverse Repo Rate: The rate at which RBI borrows from commercial banks.
- 10. The RBI directs commercial banks to meet their social obligations through selective/ qualitative measures. These measures control the distribution and direction of credit to various sectors of the economy. CEILING ON CREDIT MARGIN REQUIREMENTS DISCRIMINATORY RATES OF INTEREST
- 11. Price stability High employment Economic growth Financial markets stability Interest rate stability Stability in foreign exchange market
- 12. There exist a non-monetized sector Excess of non-banking financial institutions (NBFI) Existence of unorganized financial market Money not appearing in an economy Time lag affects success of monetary policy Monetary policy and fiscal policy lacks coordination
- 13. Inflation is broadly understood as the general rise in the prices of goods and services year on year, inflation is a more complex phenomena associated with the money supply and currency values.
- 14. raises decreases
- 15. Indicator Current rate Inflation 7.50 Bank rate 6.75% [11] CRR 4.000% SLR 20.50% Repo rate 6.25% [12] Reverse repo rate 5.75% Marginal Standing facility rate 6.75%[13] As of 15 January 2017, the key indicators are