Amity Business School

SUBMITTED BY:-
VIKAS DUBEY(B44)
SUNNY VERMA (B45)
ANMOL SINGH (B43)
RITU RAJ (B47)
AMAN DATTA (B48)
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MONETARY POLICY
Monetary policy is the process by which the
government, central bank or monetary authority of a
country controls
(i) the supply of money
(ii) availability of money
(iii) cost of money or rate of interest
in order to attain a set of objectives oriented towards the
growth and stability of the economy. Monetary theory
provides insight into how to craft optimal monetary
policy.
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• To ensure the economic stability at full

employment or potential level of output.

• To achieve price stability by controlling inflation

and deflation.

• To promote and encourage economic growth in

the economy.
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• Bank rate policy

• Open market operations

• Changing cash reserve ratio

• Undertaking selective credit controls

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• Bank rate is the minimum rate at which the

central bank of a country provides loan to the
commercial bank of the country.

• Bank rate is also called discount rate because

bank provide finance to the commercial bank by
rediscounting the bills of exchange.

• When general bank raises the bank rate, the

commercial bank raises their lending rates, it
results in less borrowings and reduces money
supply in the economy.
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• Well organized money market should exist in the

economy.

• It is use full during the times of inflation but it

does not full fill its purpose during the time of
recession or depression.
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• It means the purchase and sale of securities by

central bank of the country.

• It is useful for the developed countries.

• The sale of security by the central bank leads to

contraction of credit and purchase there of to
credit expansion.
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• When the central bank purchases the securities the
cash reserve of member bank will be increased and
vise versa.

• The bank will expand and contract credit according to

prevailing economic and political circumstances and
not merely with reference to their cash reserves.

• When the commercial bank cash balance increase the

demand for loan and advance should increase. This
may not happen due to economic and political
uncertainty.

• The circulation of bank credit should have a constant

velocity.
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• The bank have to keep certain amount of bank money

with them selves as reserves against deposits.

• The increase in the cash rate leads to the contraction

of credit only when the banks excess reserves.

• The decrease in the cash rate leads to the expansion of

credit and banks tends to make more available to
borrowers.
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Problem: Recession and unemployment

Measures: (1) Central bank buys securities
through open market operation
(2) It reduces cash reserves ratio
(3) It lowers the bank rate

Money supply increases

Investment increases

Aggregate demand increases

Aggregate output increases by a

multiple of the increase in investment
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Problem: Inflation
Measures: (1) Central bank sells securities
through open market operation
(2) It raises cash reserve ratio
and statutory liquidity
(3) It raises bank rate
(4) It raises maximum margin against
holding of stocks of goods

Money supply decreases

Interest rate raises

Investment expenditure declines

Aggregate demand declines

Price level falls

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• Variable time lags concerning the effect of

money supply on the national income.

• Treating Interest rate as the target of monetary

policy for influencing investment demand for
stabilizing the economy.
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• Monetary policy and savings.

• Monetary policy and investment.
– Cost of credit..
– Monetary policy and public investment.
– Monetary policy and private investment.
• Allocation of investment funds.
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• In recent years starting from the mid-nineties

promoting economic growth is being given greater
emphasis in monetary policy of RBI.

• Three sub-periods:

• Monetary policy of controlled examination(1951-1972).

• Monetary policy in the pre-reforms period(1972-1991) .

• Monetary policy in the post-reforms period(1991-2000).

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Reserve bank’s responsibility in the circumstances

is mainly to moderate the expansion of credit and
money supply in such a way as to ensure the
legitimate requirements of industry and trade and
curb the use of credit for unproductive and
speculative purposes.
• To ensure controlled expansion, RBI used the
instruments:
• Changes in bank rate
• Changes in cash reserve ratio
• Selective credit control
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• Price situation worsened during the years of

1972-1974. to contain inflationary pressures RBI
further tightened its monetary policy.

• It is similar to tight monetary policy.

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• Liberal monetary policy adopted for encouraging

private sector since 1996.
• Two instrument for monetary management BY RBI
since 1996:
• Reactivation of bank rate.
• Repo rate system .
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It is introduced through which RBI can add to liquidity

in the banking system. Through repo system RBI buys
securities from the bank and there by provide funds to
them.

• Repo refers to agreement for a transaction between RBI

and banks through which RBI supplies funds
immediately against government securities and
simultaneously agree to repurchase the same or similar
securities after a specified time which may be one day
to 14 days.
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• It is the another instrument of monetary policy from

June 2000 to adjust on a daily basis liquidity in the
banking system.

• Through LAF, RBI regulates short-term interest rates

while its bank rate policy serves as a signaling device
for its interest rate policy in the intermediate period.
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THANK
YOU !