Introduction to monetary policy
Monetary policy is the policy, which concerned with the measures taken to regulate the volume of credit, created by bank. Monetary policy is also known asEXPANSIONARY or CONTRACTIONARY POLICY Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation.
Elements of monetary policy
To regulate the stock & growth rate of money. To regulate the stock & growth rate of near money. To regulate level & structure of money. To control exchange rate.
Objective of monetary policy
Price stability Economic growth Controlled expansion of quantity of money To promote saving & expansion To control business cycle To promote export or imports substituted To regulate money supply To provide infrastructure
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth
and stability of the economy.
Goals to maintain relatively stable prices and low unemployment
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy.
Expansionary policy increases the total supply of money in the economy rapidly Contractionary policy decreases the total money supply, or increases it slowly.
In every country a special institution exists which has the task of executing the monetary policy
MONETARY POLICY
MEANING Monetary policy refers to the steps taken by the RBI to regulate the cost & supply of money & credit in order to achieve the socio-economic objectives of the economy. Monetary policy influences the supply of money the cost of money or the rate of interest and the availability of money.
DEFINITION OF MONETARY POLICY
According to D.C. ROWAN , `` Discretionary act undertaken by the authorities designed to influence (a) the supply of money (b) cost of money or rate of interest and (c) the availability of money.
Techniques of Monitary policy
Quantitative technique Qualitative technique
Quantitative technique
Bank rate Statuatory liquidity ratio Multiple rate of interest Open market operation Cash reserve ratio
Qualitative control
Selective credit control Rashioning of credit Morale persuation Credit authorization scheme(CAS) Direct action
TOOLS OF MONETARY POLICY IN INDIA
BANK RATES CRR SLR REPO RATE
BANK RATE
Bank Rate is the rate at which RBI allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI.
CRR
RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.
SLR
SLR stands for Statutory Liquidity Ratio. This term indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.
REPO AND REVERSE REPO RATE
REPO RATE
It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate
REVERSE REPO RATE
It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
Advantages of monetary policies
Active policy Control money supply Seasonal variation Flexible Investment & saving oriented
Limitation of monitary policy
Restricted scope of monitary policy Lack of co-ordination between monitary & fiscal policy Unfavourable banking habits Black money Conflicting objectives
Cooperation of monetary and fiscal policy
An appropriate monetary and fiscal policy is needed for achieving targets and stability of economic activities, some special features of these two policies are: Monetary policy has less inside time lag so there is less difference in making the policy and implementing it whereas it has more outside time lag means there is more difference in implementing the policy and its outcome while fiscal policy has more inside time lag in comparison to outside time lag because there is political system for finalizing the policy but once the policy is implemented the result comes faster.
How is the Monetary Policy different from the Fiscal Policy?
The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government. The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.
