MONETARY

POLICY

PRESENTED BY:----
Kunal Goswami
UNDER THE GUIDANCE
OF:----
Prof; S.P. Kalyankar
 Money
• Store of Value
• Measurement
• Medium Of Exchange
• Payment.
• Why is Money Valuable – scarcity
– Water v/s Diamonds
 Alternate Mediums of Exchange
• Barter System
• Revolution – use old currencies ,
– eg – Czarist Coins were used in
Russia in 1920s instead of Roubles
– Gold – used through out history
Equilibrium in Money Markets

Supply of Money - RBI

Demand for money

Rate of Interest
Monetary policy is the process by which
the government, central bank, or monetary
authority of a country controls:
(i) the supply of money,
(ii) availability of money, and
(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 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,

• Expansionary policy is traditionally used to

combat unemployment in a recession by
lowering interest rates,
• A contractionary policy decreases the
total money supply while contractionary
policy involves raising interest rates in
order to combat inflation.

• Monetary policy is contrasted with

fiscal policy, which refers to
government borrowing, spending and
taxation
 HISTORY OF MONETAEY POLICY
• The beginning of monetary policy as such comes from the late
19th century, where it was used to maintain the gold standard

• During the 1870-1920 period the industrialized nations set up

central banking systems, with one of the last being the
Federal Reserve
in 1913

• Since the 1970s, monetary policy has

generally been formed separately from fiscal policy
 Reserve Ratios
• CRR – Cash Reserve Ratio
– Now at 5%
– In 1991 – it was 15%
• SLR – 25%
– Gold
– Cash & Eq
– Approved RBI Bonds – eg – Agricultural
– In 1991 – it was 38.5%
 Policy Rates
• Bank Rate – 6%
• Repo rate – 6.5%
• Reverse Repo – 5.5%
• What is Repo??
– Banks buying Securities from RBI
- reverse repo
– Short Term loans – typically 15
days
 Rates II
• PLR – Prime Lending Rate – 10.25 – 10.75%
• Savings Deposit – 3.5%
• Call Money – 4% - 5.65%
• FD 5.25 – 6.25 %, 10 years ago – as much as
14 - 15%
• Inflation – 3-6% in the last 3 years and
.61% Is today's rate
 How RBI uses monetary policy
• Changing Reserve Ratios
• Bank Rate
• Open Market Operations
 Effects of Monetary Policy

• Mostly in tandem with Fiscal Policy

• Stock Markets
• Assets Valuation – like Real Estate, Gold,
Commodities
• Least Inflation Policy – since 1999-00
• Jobs/Output
– Short Term Effects
– Jalan – “Monetary Policy a non event”
 TYPE OF MONETARY POLICE
Monetary Policy: Target Market Variable: Long Term Objective:
Interest rate on overnight A given rate of change in
Inflation Targeting debt the CPI

Interest rate on overnight

Price Level Targeting debt A specific CPI number

The growth in money A given rate of change in

Monetary Aggregates
supply the CPI

The spot price of the The spot price of the

Fixed Exchange Rate currency currency

Gold Standard The spot price of gold Low inflation as measured

by the gold price

Mixed Policy Usually interest rates Usually unemployment +

CPI change
 Recent Challenges to Monetary Policy Design …(i)

• Large capital inflows, which sometimes become

unpredictable and volatile
• Lowering inflation expectations amidst oil price shock
• Handling Asset Price Considerations in Monetary Policy
• Large credit growth driven by consumption as well as
investment demand; possible unknown future financial
stability risks in current debt driven credit boom
supported by retail credit
Recent Challenges to Monetary Policy Design
…(ii)

• Issues of Autonomy, Accountability,

Transparency & Decision-making structures

• Seeking Greater Central Bank Independence

while ensuring monetary-fiscal
coordination

• Continued large fiscal deficits, placing

debt management burden on monetary policy
• FRBM is correcting this… but would bring
new challenges for conduct of monetary
operations
 REFERANCE:--------
• WWW.GOOGLE.COM

• WWW.YAHOOFINANCE.COM
MAY BE
•
SLR is statutory liquid ratio, this is the % of deposits that need to be maintained as
liquid thru' investing in RBI bonds. SLR includes CRR, for example CRR is 7% and SLR is
10%, the 3% should be can non-cash investments.

SDR: The SDR is an international reserve asset, created by the IMF in 1969 to
supplement the existing official reserves of member countries

PLR: Prime lending rate is the rate that the bank will lend to its best customers.
Floating rate loans will be quoted as some thing like PLR+_ 1%, when RBI changes SLR,
CRR etc banks will announce chnage in PLR and other loans interest will be changed
accordingly

CAR: Capital Adequacy ratio is the amount of capital that shareholders should put in
for each 100 deposits with bank. for ex if CAR is 12.5% and a bank has a deposit base
of 100, then Bank's share capital+reserves and surplus should be atleats 12.
• A consumer price index (CPI) is a measure of the average price of
consumer goods and services purchased by households. A consumer price
index measures a price change for a constant market basket of goods and
services from one period to the next within the same area (city, region, or
nation).[1] It is a price index determined by measuring the price of a
standard group of goods meant to represent the typical market basket of a
typical urban consumer.[2] Related, but different, terms are the CPI, the RPI,
and the RPIX used in the United Kingdom. It is one of several price indices
calculated by most national statistical agencies. The percent change in the
CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for
the effects of inflation) wages, salaries, pensions, and regulated or
contracted prices. The CPI is, along with the population census and the
National Income and Product Accounts, one of the most closely watched
national economic statistics.