MONETARY POLICYof

What is monetary policy?

• Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy.

OBJECTIVES OF MONETARY POLICY

To attain price stability To control inflation To promote economic growth To attain exchange stability To promote saving and investment To control trade cycles To promote employment To regulate money supply in economy

INSTRUMENTS OF MONETARY POLICY Bank rate Statutory liquid ratio Open market operations Cash reserve ratio Repo rate& reverse repo rate Margin requirement Credit ceiling Direct action Moral persuasion

Bank rate

It is the rate at which RBI lends to the commercial bank. If bank rate is increased then commercial banks charge higher rate of interest on loans given to public.

Statutory Liquid Ratio(SLR) It means a certain percentage of deposits is to be kept by banks in

form of liquid assets in form of government securities, treasury bills and other securities notified by RBI. If SLR is more banks have to keep more deposits and hence less cash for loans available with banks.

Open market operations

It means the bank controls the flow of cash in market through sales and purchase of securities in open market. When securities are purchased by RBI.It makes payment to commercial banks &public. So the public and commercial banks have more money with them. This expands credit in market.

Cash reserve ratio(CRR) It is a certain percentage of bank deposits which every bank is

required to keep with RBI in form of reserves or balances. Higher the CRR lower will be the liquidity in market.

Repo Rate & Reverse repo rate

Repo rate is the rate at which RBI lends to commercial bank against government securities. Reduction in repo rates helps the commercial banks to get money at cheaper rate and increase in Repo rate discourages the commercial banks to get money as rate increases and become expensive. Reverse Repo rate is the rate at which RbI borrows money from commercial bank. The increase in Repo rate will increase the cost of borrowing and lending to the banks which will discourage the public to borrow money and will increase them to deposit. As rates are higher the availability of credit and demand decreases resulting to decrease in inflation. The increase in Repo rate &Reverse Repo rate is a symbol of tightening of policy.

Margin Requirement Margin is the difference between loan value and market value of

security. It is fixed by RBI,for different types of loan margin requirement is different. If margin % is more ,then less loan will be given for a certain value of security. For priority sector margin requirement is less and where credit is to be contracted margin requirement is less.

Moral Persuasion

Reserve bank ca also exercise moral influence upon its member banks with a view to purse its monetary policy.RBI convinces bank to curb loan to unproductive sectors. From time to time RBI holds meetings with the member banks seeking their cooperation in effectively controlling the monetary system of country.

Direct Action

According to 1949act ,Reserve bank can stop any commercial bank from any transaction. In case of defiance of orders of the RBI it can resort to direct action against the member bank. It can stop giving loan and even recommend the closure of member bank to central government under pressing circumstances.

Credit Ceiling In this operation RBI issues prior information on direction that

loan to commercial bank will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to public. They will allow loans to limited sector.

Key IndicatorsINDICATORS CURRENT RATE

Bank rate 9.0%

CRR 4.0%

SLR 22.0%

Repo Rate 8.0%

Reverse Repo Rate 7.0%

Marginal standing Facility Rate

9.0%

Inflation 7.73%

as in august 2014

Recent changes made by RBI• On 5th august RBI governor Mr.Raghu Ram Rajan brought down SLR from

22.50%to22% i.e. 50 bp cut in SLR which will inflow of Rs 40,000cr in Indian market which means banks will be able to provide more finances for development.

• On 5th august RBI governor Mr.Raghu Ram Rajan announced that there would be no change in Repo rate ,he said that " What we are trying to do is create an environment where we enhance the supply side without giving too much encouragement to the demand side. So we need projects to be completed, we need infrastructure to pick up because they are holding back the supply side of the economy. We are trying to do this without providing too much of a fillip to demand as this gives rise to inflationary pressure.”

Raghu Ram Rajan said that they have a target of bringing down the inflation to 6% till January 2016.and his these steps were directed towards that only and he said that we should not look towards the current benefit ,he said that their target for this year is 8% and as they have just approached towards it any much changes would not be feasible at this point.

Limitations of Money market

• Underdeveloped money market• Existence of black money• Conflicting objectives• Lack of co-ordination with fiscal policy• Limitations of monetary instruments