Monetary

measures by RBI
&
it’s effectiveness
 WHAT IS CENTRAL BANK…?

It is the apex institution of monetary

system of a country. It is banker to
other banks and to government, it
issues notes, controls monetary
supply and credit, and maintains
monetary stability.
 ORGANISATION STRUCTURE

GOVERNOR 4 LOCAL BOARD OF

DIRECTORS
4 DEPUTY
GOVERNORS

Y.V.REDDY
15 DIRECTORS
(NOMINATED BY
CENTRAL
GOVERNMENT)
 What is recession…?
• An economy which grows over a period of time tends to
slow down the growth as a part of the normal economic
cycle. An economy typically expands for 6-10 years and
tends to go into a recession for about six months to 2 years.
• A recession normally takes place when consumers lose
confidence in the growth of the economy and spend less.
• This leads to a decreased demand for goods and services,
which in turn leads to a decrease in production, lay-offs
and a sharp rise in unemployment.
• Investors spend less as they fear stocks values will fall and
thus stock markets fall on negative sentiment.
 What is monetary policy…?
It is concerned with the changing the supply of money stock and
rate of interest for the purpose of stabilizing the economy at full
employment or potential output level by influencing the level of
aggregate demand.
At times of recession monetary policy involves the
adoption of some monetary tools which tends to increase the
money supply and lower interest rate so as to stimulate
aggregate demand in the economy.
At the time of inflation monetary policy seeks to
contract aggregate spending by tightening the money supply or
raising the rate of return.
 Objectives of monetary
policy…
• 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.
 TYPES OF MONETARY POLICY

Cheap money policy : Followed in

periods of slums & depression.
Dear money policy: Followed in
periods of boom & inflation.
 Tools of monetary policy

Bank reserves policy

Open market operations
Liquid adjustment facility
Market stabilization scheme
 Bank reserves policy
• Cash reserve Ratio (CRR) is the amount of funds that the
banks have to keep with RBI. If RBI decides to increase
the percent of this, the available amount with the banks
comes down. RBI is using this method (increase of CRR
rate), to drain out the excessive money from the banks.
• 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.
 Open market operations…
• 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.
 Liquidity Adjustment Facility…
• A tool used in monetary policy that allows banks to
borrow money through repurchase agreements. This
arrangement allows banks to respond to liquidity pressures
and is used by governments to assure basic stability in the
financial markets.
• Liquidity adjustment facilities are used to aid banks in
resolving any short-term cash shortages during periods of
economic instability or from any other form of stress
caused by forces beyond their control. Various banks will
use eligible securities as collateral through a repo
agreement and will use the funds to alleviate their short-
term requirements, thus remaining stable.
 Expansionary monetary policy
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
RBI’s measures during III QUARTER
OF 2008-09
 Key rates
Key rates Apr Jul Current
2008 2008 rates

CRR 8.25 9 5

Repo Rate 7.5 9 5

Reverse 6 6 3.5
Repo
Bank Rate 6 6 6
Trends in key policy rates
 Effectiveness
• Prevented the recession…

• Recession in the economy is just the

psychological trauma…

• RBI failed to shift the aggregate demand

curve upward…
 Our suggestions…
 Government to increase the aggregate
demand should supply the money to
common people and not to banks.
 By increasing government spendings.
 By innovative ideas.
 By forcing the banks to reduce basic loans.
 By reducing tax (fiscal measure).
 Conclusion…
To fight the recession effectively
government and RBI should come together
with a combo package of monetary and
fiscal measures.
Any
Questions…
?
THANK YOU…
Presented By
Bhavna
Fatehchandani
Rekha Rawat
Samruddhi