3. Introduction
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.
RBI is the central bank of India
3
4. OBJECTIVES :
IN INDIA, THE CENTRAL MONETARY AUTHORITY IS
THE RESERVE BANK OF INDIA (RBI). MONETARY POLICY
IS DESIGNED TO MAINTAIN THE FOLLOWING OBJECTIVES:
FULL EMPLOYMENT
PRICE STABILITY
ECONOMIC GROWTH
BALANCE OF PAYMENTS
4
5. Full Employment -: Full employment has been ranked
among the foremost objectives of monetary policy. It is an
important goal not only because unemployment leads to wastage
of potential output, but also because of the loss of social standing
and self-respect.
Price Stability -: One of the objectives of monetary
policy is to stabilise the price level. Both economists
and laymen favour this policy because fluctuations in
prices bring uncertainty and instability to the economy.
5
6. Economic Growth -: One of the most important
objectives of monetary policy in recent years has been the rapid
economic growth of an economy. Economic growth is defined
as “the process whereby the real per capita income of a country
increases over a long period of time.”
Balance of Payments -:Another objective of monetary
policy since 1950s has been to maintain equilibrium in the
balance of payments.
BOP is the record of all transactions between resident of the
country and rest of the world during a particular period.
6
7. Types of monetary policy
There are two types of monetary policies :
Expansionary monetary policy
Contractionary monetary policy
7
8. Expansionary monetary policy
Expansionary monetary policy is when a central bank uses its
tools to expand the economy by increasing the money supply
and lowering interest rates which increases aggregate
demand. That boosts economic growth as measured by Gross
Domestic Product (GDP).
It is used during recession.
Recession is a temporary period of economic decline during
which trade and industrial activity are reduced.
8
9. Contractionary monetary policy
Contractionary monetary policy are set of tools that slow down the
growth rate of the economy to prevent it from overheating , these tools
includes the credit flow in the economy, interest rate and currency
exchange.
Here monetary policy are being used during Inflation.
Inflation is continuous increase in the price level of goods and services.
And increase in supply of money as compared to some benchmark.
9
10. Tools of monetary policy
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.
Statutory Liquidity Ratio (SLR)-: It is the Indian
government term for reserve requirement that the
commercial banks in India require to maintain in the form of
gold, government approved securities before providing credit
to the customers.
10
11. Repo Rate -: Repo rate is the rate at which RBI lends to its clients
generally against government securities. Reduction in Repo rate
helps the commercial banks to get money at a cheaper rate and
increase in Repo rate discourages the commercial banks to get
money as the rate increases and becomes expensive.
Reverse Repo Rate -: Reverse Repo rate is the rate at which RBI
borrows money from the commercial banks. The increase in the
Repo rate will increase the cost of borrowing and lending of the
banks which will discourage the public to borrow money and will
encourage them to deposit.
11
12. Bank Rate -: It is the rate at which the Reserve Bank is
ready to buy or rediscount bills of exchange or other
commercial papers. This rate has been aligned to the MSF
rate and, therefore, changes automatically as and when the
MSF rate changes alongside policy repo rate changes.
Open Market Operations (OMOs) -: These include both
outright purchase/sale of government securities for
injection/absorption of durable liquidity, respectively.
12
13. Marginal Standing Facility (MSF) -: A facility under which
scheduled commercial banks can borrow additional amount
of overnight money from the Reserve Bank by dipping into
their Statutory Liquidity Ratio (SLR) portfolio up to a limit
(currently two per cent of their net demand and time liabilities
deposits) at a penal rate of interest.
13
14. Current monetary policy of India
On October 4 during the first monetary policy
committee meet Urjit Patel as a governor of RBI has
announced some of the major decisions taken for the
change in some instruments of monetary policy which
involves the Policy Repo rate , Reverse repo rate
under liquidity adjustment facility (LAF) Marginal
standing facility (MSF) rate and the Bank rate
14
15. Following are data of current changes made in the
Fourth-Bi meeting for the monetary policy of india
In his first monetary policy review as a governor of
RBI, Urjit Patel has announced the decision to cut
the policy repo rate by 25 basis points from 6.5 per
cent to 6.25 per cent.
The reverse repo rate under the LAF stands
adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the bank rate to
6.75 per cent.
15
16. Following are the current data of the
present monetary policy instruments
used by the Reserve Bank of India
16
Policy Repo Rate : 6.25%
Reverse Repo Rate : 5.75%
Marginal Standing Facility
Rate
: 6.75%
CRR : 4%
SLR : 20.75%
Bank Rate : 6.75%
17. Conclusion
The monetary policy deals with the function of money supply in
the market keeping this in mind that it should not cause the
situation of inflation and recession . The Reserve bank of India
is the central authority of the monetary policy In India which use
different instruments to control the inflow and outflow of the
money in the economy .
Monetary policy is very important for the economic growth of a
country , its instruments play a very important role to adjust the
economic condition according to the current economic situation
17
