The Reserve Bank of India (RBI)
plays a pivotal role in
regulating the country’s
economy by implementing
monetary policies.
Introduction of - Monetary policy refers to the
actions taken by the RBI to
monetary policy of control the money supply,
RBI inflation, and interest rates in
the economy.
- The primary goal is to ensure
price stability, economic
growth, and financial system
stability.
Role of monetary policy
1.Controlling Inflation:
Uses tools like repo rate, reverse repo rate, and CRR (Cash
Reserve Ratio) to regulate money supply and control inflation.
2.Regulating Money Supply:
Adjusts liquidity in the economy by influencing credit
availability and interest rates.
Stabilizing Currency and
3.Exchange Rates:
Manages exchange rates to ensure stability in the foreign
exchange market.
4.Promoting Economic Growth:
Ensures adequate credit availability to businesses and
industries to support GDP growth.
5.Employment Generation:
By maintaining stable economic conditions, it indirectly
supports job creation.
6.Ensuring Financial Stability:
Regulates banks and financial institutions to prevent financial
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Types of monetary policy
1. Expansionary Monetary 2. Contractionary Monetary
Policy Policy
Increases the money supply and Reduces the money supply and
lowers interest rates to boost raises interest rates to control
economic growth. inflation.
3. Accommodative Monetary
4. Neutral Monetary Policy
Policy
Maintains a balanced money supply
Ensures liquidity to support growth to keep inflation and growth stable.
and employment during economic
slowdowns.
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Monetary policy framework
1. Inflation Targeting
Central banks set a specific inflation rate goal and adjust policies to maintain
price stability.
2. Monetary Aggregates
Focuses on controlling the money supply to influence inflation and economic
growth.
3. Exchange Rate Targeting
Manages currency value by linking it to another currency or a basket of
currencies.
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RBI ‘s Recent Policy Action
Interest Rates
Liquidity Management
RBI adjusts interest rates to make loans cheaper
or costlier, helping control inflation. They ensure banks have enough money to lend
to people and businesses.
Economic Stability
Regulations
All these actions aim to keep the economy
RBI updates rules for banks to keep the financial healthy and stable.
system safe and protect people's savings.
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Impact of monetary policy on economy
Borrowing Costs
When the RBI lowers interest rates, loans
become cheaper. This encourages people
and businesses to spend more, boosting
the economy.
Inflation Control
If inflation rises, the RBI may increase
interest rates to help control it, keeping
prices stable.
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Challenges in monetary policy
1. Inflation Management High Inflation Volatility:
High Inflation Volatility: Managing inflation is a major challenge for the RBI, especially when external factors such as global
commodity prices (oil, food, etc.) are volatile. The RBI aims for a target of 4% inflation, but achieving this in the face of
fluctuating global prices or domestic supply shocks can be difficult.
2.Inflation Expectations:
Public and market expectations about future inflation can influence current inflation, making it harder for the RBI to control
price levels. If inflation expectations are high, even small increases in demand could push inflation further up.
3. Economic Growth vs. Inflation Trade-off Between Growth and Price Stability:
There is often a trade-off between fostering economic growth and controlling inflation. Tightening monetary policy to control
inflation could slow down growth, while loosening policy to stimulate growth could lead to higher inflation.
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Conclusion
Investing in tax-advantaged
h h
accounts
The tools used by RBI have been However, external factors such as global Future challenges include improving the
effective in controlling inflation and economic trends and fiscal policies also effectiveness of monetary policy
stabilizing the economy during periods play a significant role in shaping transmission and managing inflation
of financial volatility. economic outcomes. expectations amidst global
uncertainties.
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