1. Managerial Economics - 2
Presented by
Lavita Coelho (05)
Akash Halankar (14)
Rahul Kadam (16)
Vineet Kathare (17)
Ajay Sarate (37)
Topic on...
Monetary Policy

2. Meaning of Monetary Policy
1.The Monetary Policy is the policy statement, traditionally a
announced twice a year.
2. Monetary policy is the management of money supply and
interest rates by central banks to influence prices and employment.
3.These factors include - money supply, interest rates and the
inflation.
4.Reserve Bank of India (RBI) is the Central Bank of India
wherein it also announces norms for the banking and financial
sector and the institutions which are governed by it.
5.During the times of high inflation price rise is sought to be
controlled by reducing the money supply and raising the interest
rates which brings about a fall in aggregate demand and prices.

3. When is the Monetary Policy announced?
1. Historically, the Monetary Policy is announced twice a year
2.a slack season policy (April-September) and a busy season policy
(October-March) in accordance with agricultural cycles.
3.The Reserve Bank of India announced all its monetary
measures twice a year in the Monetary and Credit Policy .
4.With the share of credit to agriculture coming down and
credit towards the industry being granted whole year
around, the RBI since 1998-99 has moved in for just one policy
in April-end.

4. The Objectives of Monetary Policy
1.Economic Growth:
In both rich as well as poor countries the primary
objective of a monetary policy is sustained economic growth
2. Full employment:
All productive resources under an economy must be
employed according to the monetary policy formulated by the
central bank.
Inflation and deflation period must be avoided.
Moderate growth in prices i.e. under 3% per annum will be
consistent with the objective of attaining price stability.
3. Price Stability:

5. Features of Monetary Policy of India since 90’s.
1. Slow growth:
Another major factor in controlling this growth was the
lower level of foreign exchange inflows.
2.Monetary Growth:
Despite falling inflation, real rates faced by industry
remained high.
3. Growth of M3:
Growth in broad money (M3) in 1997-98 registered an
increase, higher than the RBI's growth target.
4. Credit policy:
The credit policy for April-October 1998, aimed to
accelerate industrial investment & output to meet business wants.

6. How does the Monetary Policy impact the individual?
1. In recent years, the policy had gained in importance due to
announcements in the interest rates.
2. Earlier, depending on the rates announced by the RBI, the
interest costs of banks would immediately either increase or
decrease.
3. A reduction in interest rates would force banks to lower their
lending rates and borrowing rates.
4. The financial sector reforms commenced, the RBI has moved
towards a market-determined interest rate scenario.
5. The bank rate is a tool used by RBI for this purpose as it
refinances banks at the this rate. In other words, the bank rate
is the rate at which banks borrow from the RBI.

7. How does the Monetary Policy affect the
domestic industry and exporters in
particular?
Exporters look forward to the monetary policy since the central
bank always makes an announcement on export refinance, or
the rate at which the RBI will lend to banks which have
advanced pre-shipment credit to exporters. A lowering of these
rates would mean lower borrowing costs for the exporter.

8. How is the Monetary Policy different from the
Fiscal Policy?
1. Two important tools of macroeconomic policy are Monetary
Policy and Fiscal Policy.
2.The Monetary Policy is different from Fiscal Policy as the
former brings about a change in the economy by changing money
supply and interest rate, whereas fiscal policy is a broader tool
with the government.
3.Fiscal policy may be defined as a deliberate change in
government revenue and expenditure to influence the level of
national output and prices.
4.The Monetary Policy aims to maintain price stability, full
employment and economic growth.

9. Is the money supply related to jobs, wages and output?
1. At any point of time, the price level in the economy is
determined by the amount of money floating around.
2. An increase in the money supply - currency with the public,
demand deposits and time deposits - increases prices all round.
3. The RBI follows a least-inflation policy, Jobs, wages and
output are affected over the long run, if the trends of high
inflation or low liquidity persist for very long period.
4. If wages move slower than other prices, higher inflation will
drive real wages lower and encourage employers to hire more
people

10. Indian Annual Monetary Policy 2008-2009:
India’s Annual Monetary Policy declaration on 29th April, 2008
is detailed as under:
1. With inflation still in the double digits the Reserve Bank of
India announced a further increase in the Repo Rate by 0.5%
to 9% and also a 0.25% increase in the Cash Reserve Ratio also
to 9%.
2. The central bank has also exuded confidence that the inflation
will be reined in soon with the ‘realistic’ target being to bring it
down to 7 percent by March 2009.
3. However, the markets have responded negatively to the news
and have extended their losses with the Sensed crashing by 471
points within minutes of the announcement by the apex bank.

11. 4. Commercial, home, personal and car loans are sure to cost more
as the latest hike would suck up over Rs 8,000 crore of liquidity
from the market.
5. CRR is the percentage of amount that banks are required to
park with the Reserve Bank. RBI had set a goal of limiting
inflation to 5-5.5 percent.
6. The Reverse Repo Rate (The short-term rate at which the
central bank absorbs cash from the market) remains unchanged
at 6 percent.
7. The Bank Rate (rates used to price long-term loans to firms
and individuals) has also been kept steady at 6.0 percent.