5. Economic Environment - Monetary Policy

8/19/2019 5. Economic Environment - Monetary Policy

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Business Environment &Business Laws


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Monetary Policy


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TPK

Compare and contrast different economicsystems?

India has opted for mixed economy. Do you thinkthis has worked well for the Indian economy?Justify.

What are growth drivers in India’s economicdevelopment?


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Agenda

ypes of economic policies

!conomic li"erali#ation$ fiscal and monetarypolicies and "udget

W % and International !conomy

Industrial policy

rade &olicy!conomic Development and role of government

&rivati#ation ' &u"lic (ystems )anagement


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Hope is not a strategy.

* John )auldin


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Monetary Policy

o )onetary and Credit &olicy is the policy statement$announced twice a year$ through which the +eserve,ank of India seeks to ensure price sta"ility for theeconomy.

o -ims at regulating money supply )/0$ interest rates andthe inflation.

o +,I also announces norms for the "anking and financialsector and the institutions which are governed "y it.


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Monetary Policy vs. Fiscal Policy

o )onetary &olicy1o +egulates the supply of money2o Cost and availa"ility of credit2 Deals with "oth the lending

and "orrowing rates of interest for commercial "anks.o -ims to maintain price sta"ility$ full employment and

economic growth.o 3iscal &olicy1

o 4sed to overcome recession and control inflation.o - deli"erate change in government revenue and

expenditure to influence the level of national output andprices.


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!"ectives o# Monetary Policy

&rice sta"ilityCredit availa"ility

(ta"ility of exchange rare

3ull employment5igh rate of economic growth

Distri"ution of money

)onetary policy is carried out via central "ank +,I0. It is a

6transmission mechanism’. ,anks decisions influence

households and firms.


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Tools #or Monetary Policy

%pen market operations ,uying and selling of securities$ normally government

securities$ in order to increase or decrease supply of money.

!xpansionary open market operation 7 Downward pressure on

short8term interest rates.

Contractionary open market operation 7 4pward pressure on

short8term interest rates.


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+eserve re9uirements Cash +eserve +atio C++01 - specified minimum fraction

of the total deposits of customers$ which commercial

"anks have to hold as reserves with the central "ank.4sed for controlling money supply in the economy.

(tatutory :i9uidity +ation (:+01 -mount that thecommercial "anks re9uire to maintain in the form of goldor govt. approved securities "ond and shares of differentcompanies0 "efore providing credit to the customers.4sed to control the expansion of "ank credit.


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+eserve re9uirements %pen )arket %perations1 ,uying and selling of ;ovt.

securities in the open market . During inflation +,I sells

securities in the open market which leads to transfer ofmoney to +,I. hus money supply is controlled in theeconomy.


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:ending "y central "ank at ,ank +ate +ate at which a nation


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+epo rates +epos 7 +epurchase agreements. +epo or repurchase option is a means of short8term

"orrowing$ wherein "anks sell approved governmentsecurities to +,I and get funds in exchange.

It is a short8term interest8"earing loan against collateral.

-nnuali#ed rate of interest paid on the loan is known asrepo rate.

Central "ank uses repos to manage aggregate reservesof "anking system.


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+everse +epo rates ,anks purchase government securities from +,I and lend

money to the "anking regulator$ thus earning interest.

It amounts to +,I "orrowing money from "anks.


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Monetary Policy in t$e % st 'entury

)onetary policy in operationDesire to monitor inflation vs. desire to "oost output and

employment.

4se of money as an 6Intermediate’ targetCentral "ank can only decide the amount of money supply in a

given year$ "ut cannot set the amount of money in the financial

system.

!8money and falling demand for central "ank money

!lectronic su"stitutes for cash threaten to reduce demand for

central "ank money.


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Central "ank’s a"ility to influence interest rates$ exchangerates$ and money supply are eroding.

Implications of a declining demand for "ase money,ase money "ecomes less significant eroding central "ankinfluencing the "roader monetary system.

&rices and interest rates would "e more vulnera"le to externalshocks.

;lo"ali#ation of monetary policy)onetary policy re9uires glo"al orientation.3rom administered regime of interest rate to market "asedprocess.


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)onetary policy and inflationhe practice of inflation targeting.

wo tools 7 %pen market operations2 Interest rate charged "y"anks on advances.

)aintenance of price sta"ility fosters greater output andemployment.

Central "ank independence&ersonnel matters1 -ppointment and dismissal of top "rass.

3inancial aspects1 3unding of government expenditure.

Conduct of policy1 3lexi"ility to central "ank.


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Monetary Policy in (ndia

,ank +ateDeposit +ate1 = > year .@@ 7 A.@B

&:+1 +ate at which most creditworthy "orrowers are given

loans.+epo +ate 1 .@C++1 2 (:+1 EE.B)onetary &olicy %perations

:i9uidity management1 +,I’s two committees 7 Working groupon instruments of sterili#ation and an internal group on:i9uidity -dFustment 3acility.


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Monetary Policy in (ndia

)arket (ta"ili#ation (cheme )((01 -ligning interest rates oncapital inflows to that of international rates. %perationali#ed in

-pril E@@ .

:i9uidity -dFustment 3acility :-301 +epo and +everse repo.

Interest rate policy1 ransparency in pricing of loan products "y"anks through ,enchmark &rime :ending +ates.

Credit delivery1 !nsures ade9uate flow of credit to agriculture$()!s and infrastructure at reasona"le rates.

+efer http1GGwww.r"i.org.inGscriptsG,(H iew,ulletin.aspx for +,I ,ullletin

http://www.rbi.org.in/scripts/BS_ViewBulletin.aspxhttp://www.rbi.org.in/scripts/BS_ViewBulletin.aspx


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How does monetary policy a##ect t$e !usinessenvironment o# a company)

5. Economic Environment - Monetary Policy

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