Presentation 2024
MONETARY
POLICY
Submitted by
Manmeet 645
Siya 646
Angelica 688
Akshay 698
Monetary policy refers to the policy
formulated by the RBI and it is
MEANING 01
related to all the monetary matters
of the country.
It refers to the decisions taken to
regulate the supply of money , 02
availability and cost of money in
the economy.
The setting up of a committee to decide monetary
policy was first proposed by the Urjit Patel
Committee. It consists of 5 member that includes 3
03 members from the RBI and 2 members nominated
by the government. The committee came into force
on 27 June 2016.
RBI reviews the monetary policy after
every 2 months that is 6 times in a year
as it's a tool to control cash flow in the
04
economy.
Financial
Economic Growth Employment security
It provides special loan
One of the major
schemes to the The major reason for
objectives of unemployed youths to creating a monetary
monetary policy is to generate more policy is to develop a
ensure that there is a employment. It also helps more secure financial
necessary supply of in increasing employment
system. Its main aim is to
money and credit in an by providing loans to
prevent financial dreads
small and medium based
economy for growth. in case of bank failure.
entrepreneurs.
Credit to priority Developing
sector Infrastructure Price stability
The general price level
Monetary policy Monetary
Introduce the policy
company's main
in an economy does
competitors.
aims to provide aims at not change much over
more funds to
developing time. It controls the
priority sectors by
infrastructure. It economy's inflation
lowering interest
rate. Furthermore, the
rates for these provides
sectors. The priority money supply affects
concessional the price level, so
sector includes
funds for monetary policy
agriculture, small-
scale industry, and developing manages the money
weaker sections of infrastructure. supply to maintain
society. price stability.
QUANTITATIVE
INSTRUMENTS OF
MONEY SUPPLY
BANK RATE REPO RATE
STATUTARY LIQUIDITY REVERSE
RATIO REPO RATE
PEN MARKET
O CASH RESERVE
OPERATIONS RATIO
BANK - The bank rate is the minimum rate at which the central bank lends money and
RATE rediscounts first-class bills of exchange and securities held by commercial banks.
When RBI gets a hint that inflation is rising, it increases the bank interest rates so
that commercial banks borrow less money and the inflation stays under control.
SLR SLR - It is the percentage of total deposits that banks have to keep with
themselves in the form of safe and liquid assets
1. An increase in SLR shall lead to reduced lending capacity of banks,
leading to the reduced money supply in the economy => decrease in
inflation
2. A decrease in SLR means more money to lend => increased money supply
OPEN MARKET Buying and selling of G-secs in the open market by RBI is known as Open
OPERATIONS Market Operation (OMO).
When there is excess money supply then RBI sells G-secs. It means g-
secs issued by RBI are bought by the market and RBI sucks excess
money out of the market.
When there is a low money supply then RBI buys g-secs. It means it
releases money in the market.
REPO RATE It is the rate of interest at which a central bank lends to
a bank for a short period of time against government
securities. An increase in RR will decrease the money
supply and vice-versa
REVERSE The rate at which RBI borrows from the banks for
REPO RATE a short period of time. If reverse repo increases
then money supply will decrease and vice-versa
CRR
It is the percentage of total deposits (NDTL) of banks that they are required
to keep with RBI at any point in time.
In times of High inflation: During inflation (excess money supply) RBI
increases CRR. This means that banks have to keep more money under
CRR requirements, which means they have less money to lend out. This
leads to decrease in money supply
QUALITATIVE
INSTRUMENTS OF
MONEY SUPPLY
MORAL SUASION DIRECT ACTION
ARGIN
M RATIONING OF
REQUIREMENTS CREDIT
oral suasion: A combination of pressure and
M
persuasion used to check the credit creation
capacity of commercial banks. It's often done
through letters, discussions, and speeches.
Credit Rationing - Under credit rationing, RBI fixes a ceiling (maximum limit)
on loans and advances of various categories, which the commercial banks
cannot exceed.
This controls the amount of credit for certain sectors and ensures that all
sectors get adequate credit. This is required for inclusive growth of all sectors
of the economy.
Changing Margin Requirements: Margin is the amount that has to be
contributed by the borrower for availing any loan. The full amount of the loan
is not given; rather the borrower has to contribute some sum as margin. If the
margin is high, then off-take of the loan is low and vice-versa.
RBI controls credit by fixing high margins. This is aimed to restrict the use of
credit for purchasing securities by speculators.
Direct action: A forceful method used to bring
institutions and the banking sector in line with monetary
policy objectives.
Types Of Monetary Policy :-
Monetary policy encompasses the measures
implemented by a central bank or monetary authority to
regulate the money supply and interest rates, thereby
influencing economic activity. There are two principal
types of monetary policy:
1). Expansionary Monetary Policy :-
(i). Objective: - To boost the economy by expanding the money supply and
decreasing interest rates.
01
(ii). Methods: -
02
(a) Lowering interest rates to promote borrowing and investment.
04
(b) Reducing reserve requirements for banks, allowing them to increase lending.
(c) Conducting open 06market operations by buying government securities to add
liquidity to the economy.
07
(iii). When Used: - During times of economic slowdown or recession to encourage
growth and decrease unemployment.
2). Contractionary Monetary Policy :-
(i). Objective: Control inflation by reducing the money supply and increasing interest rates.
(ii). Methods:
(a) Raising interest rates to make borrowing more expensive, reducing spending and investment.
(b) Increasing reserve requirements for banks to limit lending.
(c) Selling government securities to withdraw excess liquidity from the economy.
(iii). When Used: During periods of high inflation to stabilize prices and prevent overheating of the economy.
At Last, Both policies are aimed at maintaining economic stability, balancing growth, inflation, and
employment levels.
Role of monetary policy
In the Indian economy, the RBI is the only monetary institution that controls monetary supply. RBI's
monetary policy aims to manage the quantity of money in order to meet the needs of various
sectors of the economy while also increasing the rate of economic growth in India.
01 02 03 04
Managing
Controlling inflation Promoting economic Maintaining price
macroeconomics factors
RBI uses monetary growth stability It helps to manage a country's
policy tools like RBI's monetary policy RBI's monetary policy economy and ensure financial
repo rate CRR and aims to increase the rate helps to maintain price stability by regulating
SLR to manage of economic growth in stability and ensure macroeconomic factor such as
inflation. India economic growth inflation and unemployment
IMPACT OF MONETARY
POLICY
1) Impact on interest rates:-
An increase in interest rate can make borrowing more
expensive for individuals and a business which leads to
decrease in consumer spending and a slow down in
business investment which can negatively impact
economic growth
2) Impact on the housing market:-
Higher interest rate can make it more expensive for
people to Borrow money to buy a house,
potentially leading to a decrease in the demand for
housing and house price.
3) Impact on the stock market:-
Monetary policy can also impact the stock market by
lowering interest rate which make it cheaper for
companies to borrow money to invest in the business
boosting stock price
4) Impact on exports:-
An expansionry monetary policy can lead to a weaker
domestic currency making exports cheaper for foreign
buyers which can boost the countries export and trade
balance
Measures To Control Inflation :-
1). Monetary Policies
2). Fiscal Policies
3). Other Measures
1). Monetary Policies :-
(i). Control Over Money:-
It is suggested that to check inflation, government should impose strict
restrictions on the issue of money by the central bank.
(ii). Credit Control :-
Central bank should pursue credit contraction policy. For that purpose, it should use
both quantitative and qualitative techniques. Inather words, it should increase bank
rate, raise minimum CRR, Sell securities in the open market, etc. Moreover, central
bank can issue directives to other member banks in the country to restrict credit.
(iii). Demonetisation of Old currency:-
When inflation assume dangerous proportions, the gout. demonetises old
currency and Issues new currency. However, government may allow a limited
amount of old currency to be exchanged for new currency.
2). Fiscal Measures :-
(i). Decrease In Public Expenditure :-
One of the mam reasons of inflation is excessive public expenditure. It is therefore,
suggested that government should drastically scale dawn its non-expenditure
expenditure.
(ii). Increase In Public Debt :-
In order to reduce public expenditure, it is essential that private sector's purchasing
power be mopped up by public borrowing. It can be done through the sale of
debentures and bonds.
(iii). Delay In The Payment of Old Debts:-
Payment of old debte that fall due should be postponed for sometime so that
people may not acquire extra purchasing power.
(iv). Increase In Taxes :-
Government can impose new taxes and raise rates of old taxes. However
care should be taken that taxes do not have any aduerse effect on
production.
(v). Over-valuation Of Money :-
It has been mentioned earlier that devaluation accounte for inflation. To correct this
situation it is, therefore, essential to over-value the money.
(vi). Less Deficit Financing:-
Government should eschew deficit financing as far as possible. It should reduce its
non-essential expenditure to the minimum and increase its revenue resources. It
should have balanced budgete.
3). Other Measures :-
(i). Increase In Production:-
Increase is production is a most effective and direct method of checking
inflation. Those goode Should be produced more whose prices are likely to rise
rapidly. In order to Increase production, public sector should be expanded and
private sector should be given incentives. and basic facilities for industrial
advancement.
(ii). Proper Commercial Policy :-
In order to increase the supply of goods, government should pursue proper
commercial polky. Experts of such goods should be discouraged.
(iii). Proper Investment Policy:-
Investment in those industries be increased awherein. production of goods can
be accelerated over a short period. Less investment should be made in
industries having long gestation period.
(iv). Price Control & & Rationing :-
Price control deters the industrialicts from raising the prices of their goods
arbitrarily. Rationing system enables all the consumers to get their essential
requirements at fair prices.
(v). Encouragement to Sauings:-
During inflation, government should come out with attractive saving schemes. It may
resort to compulsory Sauing Scheme or issue 5 or 10 year prise bonds, etc., to
promote savings in the camtry.
(vi) Control Over The Distribution of Profits of Joint Stock Companies:-
Control over the distribution of profits of joint stock companies reduces the
purchasing power of the share- -holders and herve, their demand for goods and
services.
(vii) Proper Wage Policy :-
Higher wages contribute to inflationary pressure in the economy as they enable
the wage-earners to buy more. goods and services. Due to their short supply
prices rise and there is a fresh demand for wage increase. In this way a vicious
circle is set in motion. Hence, wage policy should be such as not to add to
inflation.
Conclusion
Monetary policy is just a measure adopted by the Reserve bank of India for
the control of money supply and credit creation by the commercial banks to
keep a check on the inflationary and deflationary situation in the economy. To
make the monetary policy framework, a committee of 5 members called the
monetary policy committee (MPC)is made to determine the interest rates on
deposit accounts and loans in the country by the rates fixed by them with the
help of various direct and indirect instruments. Ese
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