Monetary Policy
MBA Ist
Objective of Monetary Policy
• To establish equilibrium at employment/potential level of output full
• To ensure price stability by controlling inflation and deflation.
• To promote/encourage economic growth of the economy
What is it
• Monetary policy is concerned with changing the supply of money stock and rate of interest for the purpose of stabilising the economy at full employment or potential output level by influencing the level of aggregate demand.
Monetary Policy and RBI
• Growth with price stability is the goal of monetary policy of the RBI of India
Tools of Monetary Policy
• There are four major tools/instruments of monetary policy: 1. Open market operations 2. Changing the bank rate 3. Changing the Cash Reserve Ratio (CRR) 4. Undertaking selective credit controls
Open Market Operation
• By this the Central bank of a country can reduce the availability of credit in the country • Under open market operations, the central bank/Reserve Bank sells Govt. Securities to Banks specially who buys these securities and make payment for them in terms of Cash Reserves. • Thus with the reduced cash reserves, their lending capacity to the business firm will also reduce. • This will ultimately reduce the supply of credit/loanable funds, which in turn reduce the Investment.
Open Market Operation
• In India Open Market Operation don’t play a significant role • Becoz market for Govt. securities is narrow and captive • General public don’t buy more than a fraction of Govt securities • Institutions such as commercial bank, LIC, GIC and Provident fund which are required to invest a certain portion of their fund in Govt securities by laws.
Changing the Bank Rate
• Bank Rate: It is the interest rate charged by country’s central bank on loans and advances to control money supply in the economy and banking sector.
Changing the Cash Reserve Ratio
• CRR (Cash Reserve Ratio) can be raised to club inflation. • CRR: Cash Reserve Ratio is that cash which by law the banks have to keep a certain portion of cash money with themselves as reserves against their deposits. • To contract credit availability RBI can raise CRR
Changing the Cash Reserve Ratio
• SLR (Statutory Liquidity Ratio): In addition to CRR, banks have to keep a certain minimum portion of their deposits in the form of specified liquidity assets (ex Govt securities). • By raising this RBI can contract the availability of credit.
Undertaking selective credit controls
• Selective credit control also known as qualitative credit controls • This regulate the flow of credit for particular or specific purposes. • +ve impact: Measures are taken to stimulate the greater flow of credit to some particular sectors considered as important. • -ve impact: Several measures are taken to restrict the credit flowing into some specific activities or sectors which are regarded as undesirable or harmful from societal point of view.
• The selective credit controls generally used are: • Changes the minimum margin for lending by banks against the stock of specific goods kept or against other securities. • Fixation of maximum limit/ceiling on advances to individual borrowers against stocks of particular sensitive commodities • Fixation of minimum discriminatory rates of interest chargeable on credit for particular purpose
doc_981391600.pptx
MBA Ist
Objective of Monetary Policy
• To establish equilibrium at employment/potential level of output full
• To ensure price stability by controlling inflation and deflation.
• To promote/encourage economic growth of the economy
What is it
• Monetary policy is concerned with changing the supply of money stock and rate of interest for the purpose of stabilising the economy at full employment or potential output level by influencing the level of aggregate demand.
Monetary Policy and RBI
• Growth with price stability is the goal of monetary policy of the RBI of India
Tools of Monetary Policy
• There are four major tools/instruments of monetary policy: 1. Open market operations 2. Changing the bank rate 3. Changing the Cash Reserve Ratio (CRR) 4. Undertaking selective credit controls
Open Market Operation
• By this the Central bank of a country can reduce the availability of credit in the country • Under open market operations, the central bank/Reserve Bank sells Govt. Securities to Banks specially who buys these securities and make payment for them in terms of Cash Reserves. • Thus with the reduced cash reserves, their lending capacity to the business firm will also reduce. • This will ultimately reduce the supply of credit/loanable funds, which in turn reduce the Investment.
Open Market Operation
• In India Open Market Operation don’t play a significant role • Becoz market for Govt. securities is narrow and captive • General public don’t buy more than a fraction of Govt securities • Institutions such as commercial bank, LIC, GIC and Provident fund which are required to invest a certain portion of their fund in Govt securities by laws.
Changing the Bank Rate
• Bank Rate: It is the interest rate charged by country’s central bank on loans and advances to control money supply in the economy and banking sector.
Changing the Cash Reserve Ratio
• CRR (Cash Reserve Ratio) can be raised to club inflation. • CRR: Cash Reserve Ratio is that cash which by law the banks have to keep a certain portion of cash money with themselves as reserves against their deposits. • To contract credit availability RBI can raise CRR
Changing the Cash Reserve Ratio
• SLR (Statutory Liquidity Ratio): In addition to CRR, banks have to keep a certain minimum portion of their deposits in the form of specified liquidity assets (ex Govt securities). • By raising this RBI can contract the availability of credit.
Undertaking selective credit controls
• Selective credit control also known as qualitative credit controls • This regulate the flow of credit for particular or specific purposes. • +ve impact: Measures are taken to stimulate the greater flow of credit to some particular sectors considered as important. • -ve impact: Several measures are taken to restrict the credit flowing into some specific activities or sectors which are regarded as undesirable or harmful from societal point of view.
• The selective credit controls generally used are: • Changes the minimum margin for lending by banks against the stock of specific goods kept or against other securities. • Fixation of maximum limit/ceiling on advances to individual borrowers against stocks of particular sensitive commodities • Fixation of minimum discriminatory rates of interest chargeable on credit for particular purpose
doc_981391600.pptx