MONETARY POLICY

The regulationof the money supply and interest rates by a central bank, such as the Reserve Bank of India in order to control inflation and stabilize currency.Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the Reserve Bank can affect the amount of money that is spent by consumers and businesses.

MEANING

According to Prof. Harry Johnson ,"A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy".

According to A.G. Hart, "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy".

DEFINITIONS

Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution

In India, the RBI has always aimed at the controlled expansion of bank credit and money supply, with special attention to the seasonal needs of a credit

OBJECTIVES

INSTRUMENTS OF MONETARY POLICY

The instrument of monetary policy are tools or devise which are used by the monetary authority in order to attain some predetermined objectives. There are two types of instruments of the monetary policy

Quantitative Instruments or General Tools

Qualitative Instruments or Selective Tools

INSTRUMENTS(CONTD)

Bank Rate Policy

Open Market Operations

Variation in the Reserve Ratio

Quantitative instruments

Fixing Margin Requirements Consumer Credit Regulation Publicity Credit Rationing Moral Suasion Control through Directives Direct Action

Qualitative Instruments

OBSTACLES IN IMPLEMENTATION OF MONETARY POLICY

Though the monetary policy is useful in attaining many goals of economic policy, it is not free from certain limitations. Some of the important limitations of the monetary policy are given below

There exist a Non-Monetized Sector

Excess Non-Banking Financial Institutions (NBFI)

Existence of Unorganized Financial Markets

Higher Liquidity Hinders Monetary Policy

Money Not Appearing in an Economy

Time Lag Affects Success of Monetary Policy

Monetary & Fiscal Policy Lack Coordination

OBSTACLES IN IMPLEMENTATION OF MONETARY POLICY(contd)

REFORMS IN THE INDIAN MONETARY POLICY DURING 1990S

The major changes in the Indian Monetary policy during the decade of 1990.

Reduced CRR and SLR requirementsIncreased Micro FinanceFiscal Monetary SeparationChanged Interest Rate Structure

Changes in Accordance with the External reforms Higher Market Orientation for Banking

REFORMS (CONTD)

During the reforms, though, the Monetary policy has achieved higher success in the Monetary policy, it is not free from limitation or demerits

Failed in Tackling Budgetary Deficit Limited Coverage Unorganised Money Market Predominance of Cash Transactions Increased Volatility

Evaluation of the Monetary Policy in India

RBI MONETARY POLICY STATEMENT FOR 2011-12

The following are the highlights of the Monetary Policy Statement for 2011-12 by Reserve Bank of India (RBI) Governor D Subbarao:

* Short term lending rate (repo) hiked by 50 bps to 7.25 pc.* Repo rate to be only effective policy rate to better signal monetary policy stance from now on.* Reverse repo to be fixed 100 bps lower than the repo rate.* Short-term borrowing rate (reverse repo) up by 50 bps to 6.25 pc.* Cash reserve ratio (CRR) and bank rate left unchanged at 6 pc each.•Interest rates on savings bank deposits hiked to 4 pc from 3.5 pc•(contd)

*Economic growth projected lower at 8 pc for FY'12. * WPI inflation projection lowered to 6 pc. * Objective is to contain inflation by curbing demand-side pressures. * Favours aligning of fuel prices with international crude prices to

avert widening of fiscal deficit. * Banks to get a new overnight borrowing window under Marginal

Standing Facility at 8.25 pc. * Likelihood of oil prices moderating significantly is low. * Malegam Committee recommendations on MFI sector broadly

accepted. * Bank loan to MFIs on or after April 1, 2011, will be treated as

priority sector loans.