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monetarypolicy.,
Monetary policy controls the supply of money in an economy through interest rates and other tools to achieve objectives like price stability and low unemployment. It can be expansionary by lowering rates to boost the economy during recessions, or contractionary by raising rates to curb inflation. In India, the Reserve Bank of India executes monetary policy using tools like the bank rate, cash reserve ratio, statutory liquidity ratio, repo rate, and reverse repo rate to influence the money supply and interest rates. As of October 2012, key rates like the repo rate were at 8% while inflation was at 7.5%.
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monetarypolicy.,
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- 2. Monetary policy is the process by which the monetary authority of a country controls the supplyof money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.
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- 4. Monetary policy is referred to as either being an expansionary policy, or acontractionary policy. Expansionary policy increases the total supply of money in the economy rapidly Contractionary policy decreases the total money supply, or increases it slowly.
- 5. Expansionary policy isused to combat unemployment in a recession by lowering interest rates Contractionary policy involves raising interest rates to combat inflation.
- 6. In every countrya special institution exists which has the task of executing the monetary policy
- 7. TOOLS OF MONETARYPOLICY IN INDIA • • • • BANK RATES CRR SLR REPO RATE
- 8. BANK RATE • • • • Bank Rateis the rate at which RBI allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI.
- 9. CRR • • • RBI uses CRReither to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.
- 10. SLR • SLR standsfor Statutory Liquidity Ratio. • This term indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.
- 11. REPO AND REVERSEREPO RATE REPO RATE REVERSE REPO RATE • It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. • Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate • It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. • An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
- 12. Second Quarter Review of Monetary Policy 2010-11 • The BankRate has been retained at 6.0 per cent. • It has been decided to increase the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.0 per cent to 6.25 per cent with immediate effect. • It has been decided to increase the reverse repo rate under the LAF by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. • The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net demand and time liabilities.
- 13. Expected Outcomes • Sustain the anti-inflationary thrust of recent monetary actions and outcomes in the face of persistent inflation risks. •Rein in rising inflationary expectations, which may be aggravated by the structural nature of food price increases. • Be moderate enough not to disrupt growth.
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- 15. As of 31October 2012, the key indicators are Indicator Current rate Inflation 7.5% Bank rate 9% CRR 4.25% SLR 23% Repo rate 8% Reverse repo rate 7%
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