Monetary Policy

• Changes in the cost and availability of money

and credit to achieve economic objectives

• Cost
• Availability
• Money
• Credit
• Economic objectives
 Objectives
• Price stability
• Sufficient credit to finance growth
• Stability in Balance of Payments
 Means
• Regulation of money supply
• Control over credit
• Interest rate changes
• Influence over exchange rates
 Instruments
• Open market operations
• RBI credit to banks. Bank rate. Refinance
rate and availability
• Variations in reserve requirements. CRR.
SLR
• Selective credit controls. Priority sector
lending. Directed lending
• Moral suasion
 Inflation
• Quantity theory of money
• Keynesian theory

• Money alone matters

• Money does not matter
• Money matters
 Issues
• Response to fiscal policy?
RBI credit to the government. FRBM Act
• Changes in Foreign Exchange assets
• Bank credit to the commercial sector
 Inflation
• Sustained increase in prices of goods and
services
• Inflation : required rate of return
• Real vs nominal returns
• Inflation and price changes : Speed &
acceleration
• Hyperinflation
• Deflation
 Inflation in India
• Historical perspective
• Methodology
• Index
• FE flows
• LAF. CRR. SLR. Bank rate
 Inflation
• Demand Pull & Cost Push
• Shifting of Supply/ Demand curve
• Phillips curve
• Corporate sector. Growth
• Investors. Inflation adjusted bonds.
• Borrowers.
 Interest Rate
• Price for parting with money
• Preference for current consumption versus
future consumption
• Three Friends
• Nominal and real interest rates
• Supply and demand for funds
• Globalisation and Current scenario
• Interest and exchange rates
 Impact of Interest Rates
• Investment
• Consumption demand
• Cost of funds
• Current Indian retail boom
• Consumption led growth
 Banking Sector Issues
• Non performing assets
• High cost of lending
• Small size
• Lack of expertise
• Government control
 Solutions
• Uniform application of regulatory
prudential norms
• Remove obstacles to private bank
expansion
• Privatisation of banks
• Bankruptcy procedures
• Reduce fiscal deficits
• Growth in the real sector