Presented By

Parveen Kumar Nimbrayan

Introduction

Definition and Scope

Objective

Instruments of Monetary Policy• Quantitative Measures

• Qualitative Measures

Widely used tools of economic control and

regulations.

Major aspects• Meaning and scope

• Instruments and target variables

• Role in achieving macroeconomic goals.

• Effectiveness and limitations.

Monetary policy is the process by which themonetary authority of a country controls thesupply of money , often targeting a rate ofinterest for the purpose of promotingeconomic growth and stability.

Generally Central bank to achievemacroeconomic goals.

Depends by and large on two factors.• The level of monetized economy.• Development of the capital market.

Encompasses the entire economic activities.

Economic transactions carried out withmoney as medium.

Works by changing the general price level.

Change in the supply of money affects thelevel of economic activities through price levelother instruments of monetary control (BRand CRR) work through capital market.

Developed capital market – features: -• Large number of financially strong commercial banks,

finance institutions, credit organizations, and short term billmarket.

A major part of financial transactions are routedthrough the capital markets.

The commodity sector is highly sensitive to thechanges in the capital market.

Therefore, it is necessary that capital submarketshave strong financial links with the commercialbanks.

Growth

Employment

Stability of price and foreign exchange

BOP equilibrium.

Classified under two categories:

• Quantitative measures or the Traditional

measures of Monetary control.

• Qualitative or Selective credit controls

They are :• Open Market Operations.

• Discount Rate or Bank Rate.

• Cash Reserve Ratio (CRR). –

SLR

Purchase and sale of eligible securities by the

central bank.

At inflation and boom, the central bank sells

securities in the open market and withdraws

the surplus money from circulation.

The central bank buys securities and injects

additional money into circulation during

deflation and depression.

It is the rate at which the central bank rediscountsfirst class bills.

During the period of inflation central bank raisesbank rate.• Followed by rise in the interest rate

• Will discourage borrowings and encourage savings.

During the period of deflation and depression thecentral bank lowers the bank rate.• Consequent fall in the interest rate encourages borrowings.

2012-13

8.50

2012

June

9.00

July

9.00

2013

June

8.25

July

10.25

Every commercial bank is required to keep withcentral bank a certain percentage of its depositsreserve ratio.

When reserve ratio is raised, the commercialbanks are forced to send more cash to the centralbank cash resources of Commercial banks.• Less

• Lending capacity automatically reduced.

When RR is lowered• The cash resources of banks increase

• They lend more

2012

-13 • 4.00

20

12 • June

4.75

• July 4.75

20

13 • June

4.00

• July 4.00

SLR- Commercial Banks has to keep a portion of totaldeposits with itself in liquid assets.

The objectives of SLR are:To restrict the expansion of bank credit.

To augment the investment of the banks inGovernment securities.

To ensure solvency of banks. A reduction ofSLR rates looks eminent to support the creditgrowth in India.

Value and FormulaThe quantum is specified as some

percentage of the total demand and timeliabilities ( i.e. the liabilities of the bankwhich are payable on demand anytime,and those liabilities which are accruing inone months time due to maturity) of abank.

SLR Rate = Total Demand/Time Liabilities x 100%

2012-13

23.00

2012

June 24.00

July 24.00

2013

June 23.00

July 23.00

RBI generally uses 3 kinds of selective

controls on credits:A. Minimum margins for lending against specific

securities.

B. Ceiling on the amounts of credit for certain

purposes.

C. Discriminatory rate of interest charged on certain

types of advances.