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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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