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Monetary Policy in the 21st Century

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    .MONETARY POLICY IN OPERATION Monetary policy sometimes works under conflicting goals,ex-the

    desire to avoid inflation versus the desire to boost output andemployment.ex-central bank can fix the reserves or it can set the

    interest rates on any one class of debt instruments.it can exertinfluence on these economic process.

    USE OF MONEY AS AN

    INTERMEDIATE TARGET The central bank can decide on the amount of money supply in

    a given year, but cannot directly set the amount in the financialsystem;besides,it cant directly control the volume of bank credit.

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    E-MONEY AND FALLING DEMAND

    FOR CENTRAL BANK MONEY Central bank faces a new threat .long run factors,technological ones in

    particular,reduce the effectiveness of monetary policy.these new developmentsthreaten to reduce the demand for central bank money to a level where the centralbanks leverage over the monetary system.electronics substitutes for cash becomemore widely available.

    IMPLICATIONS OF A DECLININGDEMAND FOR BASE MONEY

    THE declining demand for base money causes major problems for centralbankers.first as base money less significant,it will gradually lose its effeciveness as achannel through which the central bank can influence the broader monetarysystem.

    Secondly the decline in the demand for base money would make price and interestrates more vulnerable to external shocks and in particular to change in thetechnological and other factors that influence the demand for currency.

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    GLOBALISATION AND THE

    MONETARY POLICY

    The process of globalisation and liberalisation has necessitated wideningof the mandate of central banks.for their policies to be effective ,monetaryauthorities are required to modify the way in which they conduct monetarypolicies.central banks in emerging markets also face similar issues.

    MONETARY POLICY AND INFLATION

    One of the most significant developments in the theory and practice ofmonetary policy in he recent years has been inflation targeting.The

    rationable for inflation targeting emerges as a joint sequence as the jointconsequence of two tools of monetary policy.it can be either open marketoperation or the interest rate the bank charges on advances.in case of shortrun there is nothing monetary policy can do about either output oremployement.

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    MONETARY POLICY IN INDIA

    BANK RATE

    The bank rate is the rate at which bank borrow from RBI(reservebank of india).it is also defined as the rate of which reserve bank

    gives loans to banks by discounting bills.any revision in thebank rate by the RBI is a signal to banks to banks to revisedeposit rates as well as prime lending rate.

    .REPO RATEThe repo rate is the rate at which RBI borrows from the banks.thisis also the floor rate at which overnight deals are struck.besideslowering the cost of funds ,a lower repo rate will see theemergency of a short term yeild curve.

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    CRR AND SLR

    . Crr is the cash revenue ratio which is thepercentage of net funds that commercial bankshave to park fortnightly with the RBI to do

    business.lowering of crr means means that moremoney comes into circulation.In addition to thecrr requirement banks are supposed o maintain acertain percent of net deposits in the govement

    seurities and similar instruments specified.this isknown as statutory liquidity ratio(slr) which is25% present.

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    MONETARY POLICY OPERATIONS LIQUIDITY MANAGEMENT:

    The reserve bank modulates market liquidity througha mix of repo operations.as a capital f lows

    persisted,the reserve bank portfolio necessited aswitch from out right OMO TO REPO operations.themonetary policy operations has emerged as a keyinstrument of liquidity management.

    INTEREST RATE POLICY The reserve bank continued to take policy initiativesto impart a greater degree of flexibility to the interestrate structure.it also follow credit policy.


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