Subject – Macro EconomicsSubmitted To – Prof. Sadananda Prusty

Submitted By – Gaurav, Hemant, Yash vardhan

TITLE

Monetary Policy

CONTENTS• What is Monetary Policy

• Objective of Monetary Policy

• Types of Monetary Policy

• Instruments/Tools of Monetary Policy

WHAT IS MONETARY POLICYMonetary policy is that policy of government which corrects the situation of excess and deficient demand by regulating interest rate and availability of credit in the economy.• It is also called as Credit Policy.

• It is made by the RBI twice in a year ; April and October.

• The main objective of credit policy is to maintain price stability(i.e to control inflation rate).

OBJECTIVE• 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.

TYPESEXPANSIONARY

MONETARYPOLICY

CONTRADICTORYMONETARY

POLICY

MONETARYPOLICY

CONTRADICTARY POLICY• It is also known as Tight Monetary Policy.

• This policy tends to curb the inflation by reducing money supply in the economy.

• Slow economic growth with high interest rate.

• Borrowing money will become harder and more expensive which decreases the investment and spending by the consumers and the business.

EXPANSIONARY POLICY• It is also known as Easy Monetary Policy.

• It tends to increase growth by increasing money supply in the economy.

• The cost of borrowing money goes down in hopes that investment and spending will go up.

INSTRUMENTS

QUALITATIVE INSTRUMENTSThese instruments direct or restrict the flow of creditto specified areas of economic activity.Various instruments are:

• Margin Requirement The margin requirement of loan refers to the difference between the current value of the security offered for loans and the value of loan granted.Ex-

• Rationing Of Credit Rationing of credit refers to the fixation of credit quotas for different business activities. The central bank fixes the credit quota and the commercial banks can not exceed the quota limits while granting loans.

• Direct Action The central bank may initiate direct action against the member banks in case these do not comply with its directives.It include derecognition of a commercial bank as a member of the country’s banking system.

• Moral Suasion Sometimes the central bank makes the member banks agree through persuasion or pressure to follow its directives on the flow of credit.

QUANTITATIVE INSTRUMENTSQuantitative instruments are those instruments which affect the overall supply of money/credit in the economy. The various instruments are:• Bank Rate Bank rate is that discounting rate at which RBI discounts the eligible bills of commercial banks.1. In inflation bank rate should be more.2. In recession bank rate should be less.

• Open Market Operations It means buying and selling of government securities in the open market by the RBI.1. In inflation RBI should sell more and more

securities to the public.2. In recession RBI should buy more and more

securities from the market.

• Cash Reserve Ratio It is the minimum percentage of commercial bank total deposits kept with the RBI.

1. In inflation CRR should be more.2. In recession CRR should be less.

• Statutory Liquidity Ratio Every bank is required to maintain a fixed percentage of its assets in the form cash/liquid.This ratio is fixed by the RBI and currently SLR is 23%.

1. In inflation SLR should be more.

2. In recession SLR should be less.

• Repo Rate It is a rate at which commercial banks are borrowing either from RBI or from any other bank by keeping eligible bills as a collateral with the promise that it will repurchase these bills after a specific period. 1. In inflation Repo Rate should be more.2. In recession Repo Rate should be less.

As of 1 april 2014, the key indicators are:-

INDICATOR CURRENT RATE

INFLATION 8%

BANK RATE 9%

CRR 4%

SLR 23%

REPO RATE 8%

REVERSE REPO RATE 7%