Monetary policy influences interest rates and money supply to promote economic growth and stability. The central bank uses various tools to implement monetary policy, including open market operations, reserve requirements, and interest rates. Expansionary policy increases money supply to boost the economy during recessions, while contractionary policy decreases money supply to curb inflation. The goals of monetary policy include price stability, full employment, and economic growth. Tools include bank rates, cash reserve ratios, and credit controls.

1. Monetary Policy
Saurav Dakre
Nitesh Sakle
Shilkumar Jadhav

2. Introduction
• Monetary policy influences the decisions that
we make about how much we save, borrow and
spend
• Monetary policy is the process by which
the monetary authority of a country controls
the supply of money.
• It often targets a rate of interest for the purpose
of promoting economic growth and stability.

3. Introduction(cont..)
• The official goals usually include relatively
stable prices and low unemployment.
• Monetary policy rests on the relationship
between the rates of interest in an economy,
that is, the price at which money can be
borrowed, and the total supply of money.
• Monetary policy is conducted by a nation's
central bank.

4. Scope of monetary policy
Scope of monetary policy depends on two factors:
1. level of monetization of economy:
In a fully monetized economy, all economic
transactions are carried out with money as a
medium of exchange. In that case, monetary
policy works by changing the supply of and
demand for money and the general price level. It
is therefore capable of affecting all economic
activates-production, consumption savings and
investment. The monetary policy can influence all
major macro variables- GDP savings and
investment, employment

5. 2. Level of development of capital market
Another factor that matters in determining the
scope and the effectiveness of the monetary
policy are how developed and integrated is the
capital-market. Some instruments of monetary
control (bank ate and cash reserve ratio) work
through the capital market. Where capital market
is fairly developed monetary policy affects the
level of economic activates through the changes
in the capital market

6. Advantages and Disadvantages
Advantages:
• low inflation
• Political independence
Disadvantages:
• Conflicting goals
• Time lag

7. Types of Monetary Policy
1) Expansionary Monetary policy
2) Contractionary Monetary Policy

8. Expansionary monetary policy
• Expansionary monetary policy is simply a
policy which expands (increases) the supply of
money
• an increase in the quantity of money in
circulation
• reductions in interest rates.
• Lower interest rates lead to higher levels of
capital investment.

9. • expansionary policy is used after a recession
has already started
• purpose is to prevent a business-
cycle contraction and to address the problem
of unemployment

10. Implementation of the expansionary
monetary policy
1)Open Market Operations-:
• An activity by a central bank to buy or sell
government bonds on the open market.
• The purchase of the government bonds
increase the money supply & through their
effect on interest rates, promote investment.

11. 2)increasing the amount of discount
window lending
• The discount window allows eligible
institutions to borrow money from the central
bank, usually on a short-term basis, to meet
temporary shortages caused by internal or
external disruptions.
• Decreasing the rate charged at the discount
window, the discount rate, will encourage
more discount window lending, which will put
downward pressure on other interest rates.

12. 3) decreasing the reserve
requirement
• reserve requirement -:
it is a central bank regulation that sets the
minimum fraction of customer deposits
each commercial bank must hold as reserves
with central bank.
• By decreasing the reserve requirement, more
money is made available to the economy at
large

13. Contractionary Monetary Policy
• Contractionary monetary policy is a decrease in
the quantity of money in circulation, with
corresponding increases in interest rates
• purpose is to put the brakes on an overheated
business-cycle expansion and to address the
problem of inflation
• causes a decrease in bond prices and an
increase in interest rates.

14. Implementation of Contractionary
monetary policy
1)Open Market Operations-:
• The central bank sells government bonds ,
which decreases the money in the circulation.
2) Decreasing the amount of discount window
lending
• This makes it harder for commercial banks to
borrow reserves from the central bank.

15. 3)Increasing reserve requirement
• Due to increase in the reserve requirement
banks need to devote more reserves to back up
deposits. This forces banks to make fewer
loans at higher interest rates, which decreases
checkable deposits and the money supply

16. Objectives:
1. Price Stability
• fluctuations in prices bring uncertainty and
instability to the economy.
• The centre of focus is to facilitate the
environment which is favourable to the
architecture that enables the developmental
projects to run swiftly while also maintaining
reasonable price stability.
• It helps in reducing the income and wealth
inequalities.

17. 2. Rapid Economic Growth
• Monetary policy can influence economic growth
by controlling real interest rate and its resultant
impact on the investment.
• If the RBI opts for a cheap or easy credit policy
by reducing interest rates, the investment level
in the economy can be encouraged.
• Faster economic growth is possible if the
monetary policy succeeds in maintaining income
and price stability.

18. 3. Full Employment :
• 'Full Employment' stands for a situation in
which everybody who wants jobs get jobs
• If the monetary policy is expansionary then
credit supply can be encouraged.
• It could help in creating more jobs in different
sector of the economy.

19. 4 . Exchange Rate Stability
• Exchange rate is the price of a home currency
expressed in terms of any foreign currency.
• If the rate of exchange is stable it shows that
economic condition of the country is stable.
• The RBI by altering the foreign exchange
reserves tries to influence the demand for
foreign exchange and tries to maintain the
exchange rate stability.

20. 5. Balance of Payments (BOP) Equilibrium
• The balance of payments (BOP) of a country is
the record of all economic transactions between
the residents of a country and the rest of the
world in a particular period.
• The BOP has two aspects i.e. the 'BOP Surplus'
and the 'BOP Deficit‘
• If the monetary policy succeeds in maintaining
monetary equilibrium, then the BOP equilibrium
can be achieved.

21. 6. Neutrality of Money
• Neutrality of money is the idea that a change in
the stock of money affects only nominal
variables in the economy such as prices,
wages, and exchange rates, with no effect
on real variables, like employment , real GDP,
and real consumption.
• The change in money supply creates monetary
disequilibrium.
• Monetary policy has to regulate the supply of
money and neutralize the effect of money
expansion.

22. Instruments of Monetary Policy
The instrument of monetary policy are tools or
devise which are used by the monetary authority
in order to attain some predetermined objectives.
There are two types of instruments of the
monetary policy:
1. Quantitative Instruments or General Tools
2. Qualitative Instruments or Selective Tools

23. Quantitative Instruments or General
Tools
• These tools are related to the Quantity or
Volume of the money.
• The general tool of credit control comprises of
following instruments:
1. Bank Rate Policy (BRP)
2. Cash Reserve Ratio (CRR):
3. Statutory Liquidity Ratio (SLR)
4. Repo Rate
5. Reverse Repo Rate

24. Bank Rate Policy (BRP)
• Important technique used in the monetary policy
for influencing quantity of the credit in a country.
• The bank rate, also known as the discount rate,
is the rate of interest charged by the RBI for
providing funds or loans to the banking system.
• Increase in Bank Rate increases the cost of
borrowing by commercial banks which results
into the reduction in credit volume to the banks
and hence declines the supply of money.

25. Cash Reserve Ratio (CRR):
• Commercial Banks are required to hold a
certain proportion of their deposits in the form of
cash with RBI.
• CRR is the minimum amount of cash that
commercial banks have to keep with the RBI at
any given point in time.
• RBI uses CRR either to drain excess liquidity
from the economy or to release additional funds
needed for the growth of the economy.

26. Repo Rate
• The rate at which the RBI is willing to lend to
commercial banks is called Repo Rate.
• If the RBI increases the Repo Rate, it makes
borrowing expensive for commercial banks and
vice versa.
• As a tool to control inflation, RBI increases the
Repo Rate, making it more expensive for the
banks to borrow from the RBI with a view to
restrict the availability of money.

27. Reverse Repo Rate
• The rate at which the RBI is willing to borrow
from the commercial banks is called reverse
repo rate.
• If the RBI increases the reverse repo rate, it
means that the RBI is willing to offer
lucrative interest rate to commercial banks to
park their money with the RBI.
• The increase in the Repo rate will increase the
cost of borrowing and lending of the banks
which will discourage the public to borrow
money and will encourage them to deposit.

28. Statutory Liquidity Ratio (SLR)
• SLR is the amount that commercial banks are
required to maintain in the form of gold or
government approved securities before
providing credit to the customers.
• SLR is stated in terms of a percentage of total
deposits available with a commercial bank and
is determined and maintained by the RBI in
order to control the expansion of bank credit.

29. Current Rates
Instruments Current Rate
Inflation 8.0%
Bank Rate 8.75%
CRR 4.0%
SLR 21.50%
Repo Rate 7.75
Reverse Repo Rate 6.75

30. Qualitative Instruments or Selective
Tools
• These tools are not directed towards the quality
of credit or the use of the credit. They are used
for discriminating between different uses of
credit
• The qualitative measures do not regulate the
total amount of credit created by the
commercial banks.
• This method can have influence over the
lender and borrower of the credit.
• The Selective Tools of credit control comprises
of following instruments.

31. 1. Fixing Margin Requirements
• Generally, commercial bank give loan against
stocks and securities. While giving loan they
keep margin.
• A change in a margin implies a change in the
loan size.
• This method is used to encourage credit supply
for the needy sector and discourage it for other
non-necessary sectors.
• This can be done by increasing margin for the
non-necessary sectors and by reducing it for
other needy sectors.

32. 2. Consumer Credit Regulation
• Now-a-days, most of the consumer durables like
T.V, refrigerator, motor ,etc. are available on
installment basis financed through bank credit.
• Such a credit made available by commercial banks
for the purchase of consumer durables is known as
consumer credit.
• If there is excess demand for certain consumer
durables leading to their high prices, central bank
can reduce consumer credit by(a)increasing down
payment(b)reducing number of installments of
repayment of such credit.

33. 3. Publicity
• Through publicity Central Bank (RBI) publishes
various reports stating what is good and what is
bad in the system.
• This published information can help commercial
banks to direct credit supply in the desired
sectors.
• Through its weekly and monthly bulletins, the
information is made public and banks can use it
for attaining goals of monetary policy.

34. 4. Credit Rationing
• Credit rationing refers to the situation where
lenders limit the supply of additional credit to
borrowers who demand funds, even if the latter
are willing to pay higher interest rates.
• For certain purpose, upper limit of credit can be
fixed and banks are told to stick to this limit.

35. 5. Direct Action
• This method is adopted when a commercial
bank does not co-operate the central bank in
achieving its desirable objectives. So, the direct
action take following form:
• Central bank may charge a penal rate of
interest over and above the bank rate upon the
defaulting banks.