Monetary Policy

Monetary Policy is a regulatory policy by which the central

bank or a monetary authority of a country controls supply
of money, availability of bank credit and the rate of interest.
Types of monetary policy
 Objectives of Monetary Policy
• Growth with stability

• Financial stability

• Promotion of financial inclusion

• Employment generation

• External stability
Monetary policy Highlights
 Repo rates
• Repo ( sale and repurchase agreement) is a swap deal involving the
immediate sale of securities and simultaneous purchase of those
securities at a future date at a predetermined price.

• Repo rate is short term interest rate

• Repo Rate ---- 6.50%

Monetary Policy scenarios in
India
 Reverse repo rates
• It is the rate that banks get from RBI for parking their short term
excess funds with the RBI.

• Reverse Repo Rate --- 6.25%

 Reserve Requirement
• Cash reserve ratio: Under RBI act 1934, every scheduled commercial
bank is required to maintain a minimum average daily cash reserve
of its net demand and time liabilities with the RBI.

• RBI uses the CRR either to drain out excess liquidity or to release
funds needed for the economy from time to time.

• Recently CRR is 4%
 Reserve requirement
• Statutory liquidity ratio: Under the banking regulation act 1949,
every bank is required to maintain, at the close of business every
day, a minimum proportion of their net demand and time liabilities
as liquid assets in the form of cash, gold and government securities.

• The Narasimham committee strongly advised against high SLR. As a

result SLR was progressively lowered and is now 19.50 percent.
 Open Market Operation
• Buying and selling of government securities in the open market in
order to expand or contract the amount of money in the banking
system.

• During recession RBI purchases securities

• OMO in India has been mainly used to help government to borrow

to meet its fiscal deficits
 Qualitative methods
• Margin requirements

• Discriminatory rate of interest

• Ceiling on credit

• Direct action
Recent changes of RBI’s Monetary Policy
• Multiple indicator approach

• Delinking monetary policy from budget deficit

• Deregulation of administered interest rate system

• Reduction in reserve requirement

• Provision of micro finance

 Evaluation of Monetary policy
• Financial stability

• Adaptability

• Financial inclusion

• Promotion of growth
 Limitations
• Existence of unorganised market

• Weak channels of monetary transmission

• Unable to control inflation

• Existence of black money