Monetary policy unit 3
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The document discusses monetary policy in India. It is formulated and executed by the Reserve Bank of India to control the supply of money and regulate credit in the country. The objectives are full employment, price stability, maintaining a balanced balance of payments, and controlling business cycles. The instruments of monetary policy include quantitative measures like bank rate, open market operations, cash reserve ratio, and statutory liquidity ratio. Qualitative measures include changing margin requirements, moral persuasion of commercial banks, and direct actions like imposing ceilings on loans.
Monetary policy unit 3
- 2. MONETARY POLICY It refers to the credit control measures adopted by the Central Bank RBI of India. It is formulated and executed by RBI in India It controls the supply of the money & to regulated credit of the country.
- 3. Objectives of the monetary policy • Full employment • By providing concessional loans to productive sectors, small medium . Special loan scheme for unemployed youth. • Price stability • It implies control over inflation, wide fluctuations in price presented by increasing creating & expanding money supply in the country. • Balance of payments • By providing concessional loans to export erected & import substitution units. • Control of business cycle. • Booms & depressions are main phases of the business cycle. During boom phase price council is controlled so as to reduce money supply and in depression phase the credit is expanded, to increase money supply.
- 4. Instruments of Monetary policy •Quantitative •Qualitative
- 5. Quantitative Measures • Bank rate • It is the rate at which central bank gives credit to the commercial banks. Increasing bank rate will reduce borrowings by the commercial bank in which return contract the money supply & thus check inflation. • Similarly bank rate is decreased to provide credit to the commercial banks & expand the money supply in the country • Open market operations • It refers to the purchase & sale of government securities in the open market by commercial banks & general public. In order to contract the money supply securities are sold to the commercial bank and general public which are purchased by the central bank for the flow of the money supply in the country.
- 6. • VRR-Variable reserve ratio • CRR- Cash Reserve Ratio refers to the minimum cash balance which a commercial bank has to keep with the central bank. • SLR-Statutory liquidity ratio refers to the maintenance of minimum cash balance which commercial bank has to surplus fund itself. • If SLR is more banks will have less surplus fund for granting loans & thus help to control money supply in the market. • It SLR is fewer then banks will have more funds to grant loans & thus expand the money supply in the market • Multiple rate of interests • Under this programme RBI gives credit quota for various commercial banks. If commercial banks borrow funds from RBI in their quota , then they charge interest at the bank rate. • If the commercial banks borrow loans more than their fixed quota then they are charged with higher interest rate i.e more than bank rate,
- 7. QUALITATIVE MEASURES • Change in margin requirement of loan • Margin is difference between loan value & market value securities. It is fixed by RBI for different types of loans, margin requirement. • If margin % is more then fewer loans will be given for certain value of security & if margin % is less then more loans can be given. • Moral persuasion • RBI can also exercise moral influence upon the member banks with a view to purchase its monetary policy. • RBI convinces commercial banks to restrict loans to unproductive sectors. • Direct action • RBI can stop any bank from any type of transaction. In case of defiance of orders RBI can take direct action. • Ceiling on loans