MONETARY POLICY• MONETARY POLICY IS CONCERNED WITH CHANGES IN THE SUPPLY OF MONEY.IT REFERS TO THE STEPS TAKEN BY THE RBI TO REGULATE THE COST AND SUPPLY OF MONEY.IT INFLUENCES THE SUPPLY OF MONEY,THE COST OF MONEY ORT HE RATE OF INTEREST AND THE AVAILABILITY OF MONEY.

• It is announced twice a year –*April – September (a slack season policy)*October-March (a busy season policy)

• Maintain price stability.• Norms for the banking ,financial sector and the institutions which are governed by it.

• BANK RATE-The minimum rate at which RBI extends credit to member banks.

OBJECTIVES

• To study the changing role and important of selected monetary instruments in India.

• Growth in employment and income• To examine the effectiveness of monetary policy in ensuring price stability in India.

• Stability of the National currency.

• To find out to what extent monetary policy facilitated economic growth in India.

Evaluation

• Unsatisfactory role of capital market.

• Excessive increase in bank credit to the commercial sector.

• Excessive budgetary deficit and Government borrowings.

• Imbalance in credit allocation.• Existence of black money.• Under developed money market.

Monetary policy 2010-2011

• In the wake of the global economic crisis, the RBI pursued an accommodative monetary policy beginning mid sep 2008 .This policy instilled financial crises on the economy started recovering ahead of most of the other economies.

• The monetary policy response in India since October 2009 has been calibrated to India’s specific macroeconomics conditions.

Why monetary policy has been formed?

• Consolidating recovery

• Higher issuance of securities

• Accentuated inflationary pressures

Open market operations

• It refers to the sale and purchase of Government securities by the RBI.

• If RBI wants to contract money supply offers to sale Government securities.

• If RBI wants to expand money supply offers to purchase Government.

How does money policy affect the economy ?

• Money supply in the economy

• Jobs/wages

• Export/Import

• Interest rates and savings

Various functions of RBI• Issue of currency notes-RBI has right to issue currency notes except 1rupee coin and note.1rupee coin and note are issued by Central Government and its distributions are taken by RBI.

• Banker to the Government-Rbi acts as a banker agent and advisor to the Government.RBI receives and makes all payments on behalf of Government, buys and sells foreign currency and gives advices for all banking matters to both Central and State Government.

• Controller of credit-RBI through its qualitative and quantitative techniques regulate total supply of money .RBI pumps in money during busy season and withdraws money during slack season.

• Banker’s bank and lender off-RBI acts as a banker to all banks. It provides funds to bank when they fail to get it from other sources. Through RBI ,banks make interbank's payment.

• Collection and publication of data-The RBI collects and complies statistical information on banking and financial operations of the economy. The RBI bulletin is a monthly publication .It not only provides information, but also results of important studies and investigations conducted by RBI are given.

Recent changes in RBI’s monetary policy

Since 1991 RBI’s monetary policy has undergone some major changes-1.Multiple indicator approach-It refers to the strategy aimed at maintaining price stability by

focusing on changes in growth of supply money.

2.Provision of micro finance-By linking the banking system with self help groups.RBI introduced this scheme for rural and poor

people.

3.Selective methods being phased out-With rapid progress in

financial market, the selective methods of cr.control are slowly

phased out.

4.Reduction in reserve requirements-This has been done as a part of financial sector reforms. As a result, more bank funds have

been released for leading. This has led to the growth of economy

5.Delinking of monetary policy from budget deficit-In 1994

Government phased out the use of treasury bills. These bills are used by Government to borrow from RBI. With phasing out of

bills, RBI would no longer lend to Government to meet fiscal

deficit.

Failure of monetary policy

Huge budgetary deficits Coverage of only commercial banks

Problem of management of banks and financial institutions

Lack of transparency Black money

Open Market Operations

• It includes the sales and purchase by the central bank of

• Assets• Foreign exchange• Gold• Government Securities• Company securities

Open Market Operations

Objective• To Control the amount and changes and money supply through controlling the reverse base of banks

• To make the policy more effective• To maintain stability in the Govt. securities/T-bills market

• To smoothen the seasonal flow of funds in the bank credit market.

Use of open market Operation

• In the inflationary situation

• Central bank decrease the money supply

• Central bank sale out the securities to commercial bank and control money supply

• In the deprssionary situation

• Central bank increase the money supply

• Central bank purchase the securities from the commercial bank.

Bank Rate

• The bank rate (BR) is the rate at which the RBI buys/rediscount bills of exchange other eligible commercial papers.

• Bank rate means the minimum rate on which central bank provide financial accommodation to commercial bank in the discharge of its function as the lender of the last resort.

Effect of Bank rateIncrease in bank rate

• Increase in bank rate charge by the central bank on its advance to commercial bank. Commercial bank increase the rate of interest on their loan. Demand for the credits and loan decrease. Flow of the money decrease in the economy Use in inflationary situation

Decrease in bank rate • Decrease in bank rate charge by the central bank on its advance to commercial bank. Commercial bank decrease the rate of interest on their loan. Demand for the credits and loan increase. Flow of the money increase in the economy Use in depression situation

Cash Reserve Ratio: 

It is the cash which banks have to maintain with the RBI, as a percentage of demand and time liabilities. objective to

ensure the safety and liquidity of bank deposits. The percentage of this ratio can be changed legally by the

central bank. 

Statutory Liquidity Ratio: 

It refers to the mandatory investment that banks have to

make in govt. securities. SLR is the reserve that is set aside by

the banks for investment in cash, gold, or unencumbered

approved securities..

Objectives

• To restrict the expansion of bank credit

• To augment a bank’s investment in govt. securities and

• To ensure solvency of banks

USE OF C.R.R. & S.L.R: 

In Inflationary situation Increased the percentage of cash

reserve ratio and Statutory liquidity ratio It reduces the supply of money in an economy. In Depressionary situation

Decreased the percentage of cash reserve ratio and Statutory

liquidity ratio It increases the supply of money in an economy.

THANK YOU...!!