ECONOMICS

PROJECT
TOPIC:

MONETARY POLICY
OFINDIA

MADE BY:
AMITABH AMRIT A11911115101
FARAZ A11911115073
PRITHVI YADAV A11911115068
B.A.L.L.B(H), ALS-II, SECTION B
ACKNOWLEDGEMENT
 INTRODUCTION
WHAT IS MONETARY POLICY?

Monetary policy is the management of money supply and

interest rates by central banks to influence prices and
employment. Monetary policy works through expansion
or contraction of investment and consumption
expenditure.

Monetary policy is the process by which the government,

central bank (RBI in India), or monetary authority of a
country controls:
(i) the supply of money
(ii) availability of money
(iii) cost of money or rate of interest, in order to
attain a set of objectives oriented towards the
growth and stability of the economy. Monetary
theory provides insight into how to craft optimal
monetary policy.
Monetary policy is referred to as either being an
expansionary policy, or a contractionary policy, where an
expansionary policy increases the total supply of money
in the economy, and a contractionary policy decreases the
total money supply. Expansionary policy is traditionally
used to combat unemployment in a recession by lowering
interest rates, while contractionary policy involves raising
interest rates to combat inflation. Monetary policy is
contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.
AIMS OF MONETARY
POLICY
1) MP is a part of general economic policy of the govt.
2) Thus, MP contributes to the achievement of the goals
of economic policy.
3) Objective of MP may be:
Full employment, Stable exchange rate, Economic
growth, Reasonable Price Stability, Greater equality in
distribution of income, Wealth Financial stability

Monetary policy provides:

a) An overview of economy
b) Specifies measures that RBI intends to take to
influence such key factors like money supply, interest
rates, inflation
c)Lays down norms for financial institutions. Like
banks, fin.cos.etc. relating to CRR, capital adequacy
INSTRUMENTS OF
MONETARY POLICY
1) Variations in Reserve Ratios
2) Discount Rate (Bank Rate)
3) Open Market Operations (OMOs)
4) Other Instruments

VARIATIONS IN RESERVE RATIOS

Banks are required to maintain a certain percentage of
their deposits in the form of reserves or balances with the
RBI
It is called Cash Reserve Ratio or CRR
Since reserves are high-powered money or base money,
by varying CRR, RBI can reduce or add to the banks
required reserves and thus affect banks ability to lend.
CRR either to impound the excess liquidity or to release
funds needed for the economy from time to time.

DISCOUNT RATE (BANK RATE)

Discount rate is the rate of interest charged by the central
bank for providing funds or loans to the banking system.
Funds are provided either through lending directly or
rediscounting or buying commercial bills and treasury
bills.
Raising Bank Rate raises cost of borrowing by
commercial banks, causing reduction in credit volume to
the banks, and decline in money supply.
Variation in Bank Rate influences the domestic interest
rate, especially the short-term rates.
Market regards the increase in Bank rate as the official
signal for beginning of a tight money situation.

OPEN MARKET OPERATIONS (OMOs)

OMOs involve buying (outright or temporary) and selling
of government securities by the central bank, from or to
the public and banks.
It involves buying and selling of govt securities by the
RBI to influence the volume of cash reserves with
commercial banks and thus influence their loans and
advances.
To contract the flow of credit, RBI starts selling
government securities.
To increase the credit flow RBI start purchasing the
government securities.

REPO RATE
Repo (Repurchase) rate is the rate at which the RBI lends
shot-term money to the banks.
When the repo rate increases borrowing from RBI
becomes more expensive.
RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate.
similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate.
Current repo rate is 6.25%

REVERSE REPO RATE

Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the RBI.
The RBI uses this tool when it feels there is too much
money floating in the banking system.
An increase in the reverse repo rate means that the RBI
will borrow money from the banks at a higher rate of
interest. As a result, banks would prefer to keep their
money with the RBI.

SLR (STATUTORY LIQUIDITY RATIO)

The ratio of liquid assets to demand and time liabilities is
known as Statutory Liquidity Ratio
SLR It indicates the minimum percentage of deposits that
the bank must maintain in form of gold, cash or other
approved securities.
we can also say that it is ratio of cash and some other
approved to liabilities (deposits)
It regulates the credit growth in India. Presently the SLR
is 20.5%.
The objectives of SLR are:
1) To restrict the expansion of bank credit.
2) To augment the investment of the banks in Government
securities.
3) To ensure solvency of banks. A reduction of SLR rates
looks eminent to support the credit growth in India.

(CRR) Cash Reserve Ratio

Banks in India are required to hold a certain proportion of
their deposits in the form of cash. However Banks don't
hold these as cash with themselves, they deposit such cash
(aka currency chests) with Reserve Bank of India, which
is considered as equivalent to holding cash with
themselves. This minimum ratio (that is the part of the
total deposits to be held as cash) is stipulated by the RBI
and is known as the CRR or Cash Reserve Ratio.
Current cash reserve ratio is 4%.

Urjit Ravindra Patel an Indian economist, who is

currently serving as Governor of the Reserve Bank of
India since September 2016 gave the following as
RBIs Sixth bi-monthly Monetary Policy
Statement for 2016-17 which was
announced on 8th February 2017

6.25
Repo Rate
%
Reverse Repo 5.75
Rate %
6.75
Bank Rate
%
Marginal
6.75
Standing
%
Facility (MSF)
Cash Reserve 4.00
Ratio (CRR) %
Statutory
20.50
Liquidity Ratio
%
(SLR)
Limitations
1) Restricted Scope of Monetary Policy in Economic
Development
2) Limited Role in Controlling Prices.
3) Unfavourable Banking Habits.
4) Underdeveloped Money Market.
5) Existence of Black Money.
6) Conflicting objectives
7) Infuence of non-Monetary Factors
8) limitations of Monetary Instruments
9) Proper Implementation of the Monetary Policy
CONCLUSION
Monetary policy has to maintain a reasonable degree of
price stability to accelerate the rate of economic growth
Reasonable relationship exists between Price, income and
money supply.
While these are only some of the many tools that the
government has to control the economy of the country,
they are the most commonly used, and while they are very
popular that does not exclude them from scrutiny.
There is no perfect method to stabilize the economy of a
country as the market can only be predicted to a certain
extent and can change in a second and the best a countries
government can do is always prepare for the worst.