Monetary policy refers to the creditcontrol measures adopted by
the central bank of a country to influence the level of aggregate
demand for goods and services or to influence the trends in certain
sectors of the economy.
Monetary policy operates through varying the cost availability
of credit. There variations affect the demand for . And the supply
of credit in the economy, and the nature of economic
activities.
3.
Full Employment:- one of the objectives of monetary policy is
attain full employment. It is not only because unemployment leads
to wastage of potential output. But also because of the loss of
social standing and self- respect. It also breeds poverty.
4.
Price stability :- Another objective of monetary policy is to
stabilize the price level. Both , rising and falling prices are bad
as the bring unnecessary loss to some and undue advantage to
others. They are associated with business cycles. So a policy of
price stability keeps the value of money stable, eliminates
cyclical fluctuations. Brings economicstability, helps in reducing
inequalities of income and wealth, secures social justice and
promotes economic welfare
5.
Economic growth :-monetary policy can be imposed to influence
the rapid economic growth. Economic growth is defined as the
process whereby the real per capita income of a country increases
over a long period of time it is measured by the increase in the
amount of goods and services produced in a country. A growing
economy produces more goods and services in each successive time
period. Thus, growth occurs when an economys thus, economic growth
implies raising the standard of living of the people, and reducing
inequalities of inequalities of income distribution.
6.
Balance of payments:- another objective of monetary policy
since the 1950shas been to maintain equilibrium in the balance of
payments. It is also recognized that deficit in the balance of
payments will retard the attainment of other objectives. This is
because a deficit in the balance of payment leads toa sizeable
outflow of gold,
7.
Monetary policy plays an important role in increasing the
growth rate of the economy by influencing the cost and availability
of credit by controlling inflation and maintaining equilibrium in
the balance of payments.
8.
To control inflationary pressures, monetary policy requires the
use of both quantitative and qualitative methods of credit control.
The open market operations are not successful in controlling
inflation in underdeveloped countries as the bill market is small
and undeveloped.
9.
The use of variable reserve ratio is more effective than open
market operations and bank rate policy in LDCs. Since the market
for securities is very small, open market operations are not
successful. but a rise or fall in the variable reserve ratio by the
central bank reduces or increases the cash available with the
commercial banks without affecting adversely the prices
ofsecurities.
10.
Monetary policy is important for achieving price stability. It
brings a proper adjustment between the demand for and supply of
money. Animbalance between the two will be reflected in the price
level. A shortage of money supply will hamper the growth while an
excess will lead to inflation. As the economy develops the demand
for money increases due to the gradual monetization of the
non-monetized sector, and the increase in agricultural and
industrial production. This will increase the demand for
transactions and speculative motives. So the money supply will have
to be raised more than proportionate to the demand for money, to
avoid inflation.
11.
Interest rate policy plays an important role in bridging the
BOP deficit. Underdeveloped countries develop serious balance of
payments. To establish infrastructure like power, irrigation,
transport etc and directly productive activities like iron and
steel, chemical, electricals,fertilizers , etc, underdeveloped
countries have to import capital equipment, machinery, raw
materials, spares and components thereby raising their
imports,
12.
High interest rate in an underdeveloped country acts as an
incentive to higher savings develops banking habits and speeds up
the monetization of the economy which are essential for capital
formation and economic growth. a high interest rate policy is anti
inflationary in nature, for it discourages borrowing and investment
for speculative purpose, and in foreign currencies
13.
One of the monetary policies in an underdeveloped country is to
create and develop banking and financial institution to mobilize
and channelize saving for capital formation. establishment of
branchbanking in rural areas and urban areas should be encouraged.
It will help in monetizing the non-monetised sector and encourage
saving and investment for capital formation.
14.
It is one of the important function of monetary policy in an
under developed country it aims at proper timing and issuing of
government bonds, stabilizing their prices and minimizing the cost
of servicing the public debt. The primary aim of debt management is
to create conditions in which public borrowing can increase from
year to year borrowing is essential in order to finance development
program and to control the money supply.
15.
A financial system should be distinguished from a payments
system. it can be defined as the set of institutional
arrangementsthrough which purchasing power is transferred from one
transaction in exchange to another,
16.
The Indian financial system performs a crucial role in economic
development of India through saving-investment process, also known
as capital formation. It is for this reason that financial system
is sometimes called the financial market. The purpose of the
financial market is to mobilize effectively and allocate the same
efficiently among the ultimate users of funds viz investors.
17.
Increased in savings, that is , the resource that would have
been normally used for consumption purposes, can be released for
other development puposes
Mobilization of saveing
Investment proper, which is the production of capital
goods.
18.
Definition :- according to G. Crowther it is the collective
name given to the various firms and institutions that deal in the
various grades of near money
The indian money market is the market in which short term funds
are borrowed and lend.
19. 20.
Call money market:- the indian money market market is nota
single homogenous market but it is composed of several sub markets,
each one of which deals in particular types of short term credit.
One important sun- market of the indian money market is the call
money market, which is the market for very short term funds, also
known as money at call and short notice. This market has actually
two segments viz.the call market ovemight market and short notice
market.
21.
b) Bill market in india:- The bill market or the discount
market is the most important part of the money market where short
term bills-normally up to 90 days-ate bought and sold. The bill
market is further sub divided into commercial bill marketand
treasury bill market. The market for commercial bill has not become
very popular in india, unlike the London money market where
commercial bill are extensively bought and sold i.e
discounted.
22.
c)Acceptance market:The market for the acceptance of trade
bills. The main operators in this market are the acceptance houses
and the commercial banks
d)Collateral loan market: it is the importance section of the
money market. It takes the form of loans over drafts, cash
credit.The loan and advance are covered by collaborates like
government securities, gold silver stocks of corporation,
merchandise etc.
23.
The various institutions in the money market generally includes
the following .
Central bank : it is naturally to be the leader of all banks.
It is the bank, which is entrusted with the task of controlling the
issue of money and funds to the market and regulates credit
facilities provided by various other institution.
24.
2.Commercial banks: They play a vital role in the money market.
They make advances, discount bills and lend against the promissory
notes and the like. Theyalso takehelpof the market in solving their
liquidity problems.
25.
3.Discount houses:-discount houses are special institutions for
rediscounting the bills of exchange. They usually dealt in three
kinds of bills
The domestic bills
The foreign bills and
The government treasury bill
Acceptance House
26.
4. Acceptance house:-Acceptance house are institutions which
specialize in acceptingbills of exchange. Generally they are
merchant banker. They act as second signatories on the bills of
exchange. That is they guarantee the bills of a trader whose
financial standing is not known, for making the bill
negotiable.
27.
5. Bill brokers:-The bill brokers intimately know their
customers and act as intermediaries between the sellers and buyers
of bill for a small commission .sometimes , these bill brokers
discount bills on their own account.
28. Stock exchange
It is also known as secondary market. It is the market where
existing securities are traded.
An association, organization or body of individuals, whether
incorporated or not, established for the purpose of assisting,
regulating and controlling business in buying, selling and dealing
in securities.- securities contract act 1956
29. Functions
Ready market
Evaluation of securities
Protection of investor
Mobilization of saving
Capital formation
Economic barometer
Regulation of company management
Clearing house of information
30. Stock exchanges in India
23 stock exchanges in the country recognized under securities
contract act 1956
21 are regional ones and 2 are national stock exchange (NSE)
and over the counter exchange of India (OTCEI)
31. National stock exchange (NSE)
SET UP IN 1993 WITH IDBI AS THE NODAL AGENCY
It operates in two different segment 1.wholesale debt market
and 2. capital market. The first concerned with trading in
instrument like govt. securities, PSU bonds, CDs, CPs by corporate
entities like banks etc. the second is concerned with equity and
corporate debt instruments by corporate and individuals.
32. Over the counter exchange of India (OTCEI)
OTCEI with the headquarter in Mumbai has started its operation
in September 1992. it is jointly promoted by UTI, IDBI, IFCI, LIC,
GIC, CANBANK FINANCIAL SERVICES LTD. etc.