monetory policy1

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MonetaryPOLICY

Monetary policy is the

process by which monetaryauthority of a country,generally a central bankcontrols the supply of money

in the economy by exercisingits control over interest ratesin order to maintain price

stability and achieve high


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The Monetary and Credit

Policy is the policy statement,traditionally announced twicea year, through which theReserve Bank of India seeksto ensure price stability forthe economy.


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What are the objectivesof the Monetary Policy?

The objectives are to maintainprice stability and ensureadequate flow of credit to theproductive sectors of theeconomy.

Stability for the national currency(after looking at prevailing economicconditions), growth in employmentand income are also looked into. The

monetary policy affects the real


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INSTRUMENTS OFMONETARY POLICY

Bank Rate of Interest

Cash Reserve Ratio Statutory Liquidity Ratio

Open market Operations

Margin Requirements

Deficit Financing

Issue of New Currency


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Bank Rate ofInterest

It is the interest rate which is fixed bythe RBI to control the lending capacity of

Commercial banks . During Inflation , RBIincreases the bank rate of interest dueto which borrowing power of commercialbanks reduces which thereby reduces

the supply of money or credit in theeconomy .When Money supply Reduces itreduces the purchasing power andthereby curtailing Consumption andlowering Prices.


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Cash Reserve Ratio

CRR, or cash reserve ratio, refers to aportion of deposits (as cash) which banks

have to keep/maintain with the RBI.During Inflation RBI increases the CRRdue to which commercial banks have tokeep a greater portion of their deposits

with the RBI . This serves two purposes.It ensures that a portion of bank depositsis totally risk-free and secondly it enablesthat RBI control liquidity in the system,and thereby, inflation.


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Statutory LiquidityRatio

Banks are required to invest a portion oftheir deposits in government securities

as a part of their statutory liquidity ratio(SLR) requirements . If SLR increases thelending capacity of commercial banksdecreases thereby regulating the supply

of money in the economy.


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Open marketOperations

It refers to the buying and sellingof Govt. securities in the openmarket . During inflation RBI sellssecurities in the open marketwhich leads to transfer of money

to RBI.Thus money supply iscontrolled in the economy.


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Margin RequirementsDuring Inflation RBI fixes a highrate of margin on the securitieskept by the public for loans .If themargin increases the commercialbanks will give less amount of

credit on the securities kept by thepublic thereby controlling inflation.


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Deficit Financing

It means printing of new currencynotes by Reserve Bank of India .Ifmore new notes are printed it willincrease the supply of moneythereby increasing demand andprices.


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Issue of New Currency

During Inflation the RBI will

issue new currency notesreplacing many old notes.

This will reduce the supply of

money in the economy.

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