MONETARY POLICY OF INDIA

PRESENTED BY
V.ANIL Kumar (62)
V.MALLESWAR ARAO(63)
V.NAGAKISHORE(64)
V.SANDEEPREDDY(65)
MONETARY POLICY
 The term monetary policy refers to actions taken by central banks to
affect monetary magnitudes or other financial conditions.

 Monetary Policy operates on monetary magnitudes or variables such

as money supply, interest rates and availability of credit.

 Monetary Policy ultimately operates through its influence on

expenditure flows in the economy.

 Monetary policy also known as Money and Credit Policy

 It concerns itself with the supply of money as also credit to economy

AIMS OF MONETARY POLICY
 MP is a part of general economic policy of the govt.
 Thus MP contributes to the achievement of the goals of
economic policy.
 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 insts. Like banks,

fin.cos.etc. relating to CRR, capital adequacy
Instruments
Operation of Monetary
1. Discount Rate
(Bank Rate) Policy
2.Reserve Ratios Operating
Target
3. Open Market
Operations
• Monetary Base
• Bank Credit Intermediate
• Interest Rates Target
•Monetary
Aggregates(M3)
Ultimate
•Long term Goals
interest rates
•Total Spending
• Price Stability
Etc.
INSTRUMENTS OF MONETARY POLICY
 Variations in Reserve Ratios
 Discount Rate (Bank Rate)

 Open Market Operations (OMOs)

 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 bank’s
required reserves and thus affect bank’s 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 has an effect on 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 govt
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 govt securities

 To increase the credit flow RBI start purchasing the govt

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
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
EXAMPLE
 RBI is empowered to enter a transaction in which two parties
agree to sell and repurchase the same security
 Under such an agreement the seller sells specified securities
with an agreement to repurchase the same at a mutually
decided future date and price
 similarly the buyer purchases the securities with an agreement
to resell the same to the seller on an agreed date in future at a
predetermined price
 Such a transaction is called repo rate

 Reverse repo: from the point of view of the supplier of funds is

called reverse repo
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 has to 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 25%.
 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.
MONETARY POLICY
 CASH RESERVE RATIO:5.75
 REPO RATE:4.75

 REVERSE REPO RATE:3.25

 BANK RATE:6%

New economic growth of projection for 2009-10 is 7.5%

RBI expectations of inflation by march end 8.5%
 It is balanced approach in trying to maintain growth and
manage inflation
 Hike in CRR will definitely put a cost to banks but
bankers have told that lending rates will not go up
immediately
 Car loans customers are unlikely to be impacted by the
CRR hike due to increased competition in the market
 ICICI BANK had brought down its interest rates on car
loans
CONCLUSION

 Monetary policy has to maintain a reasonable degree of

price stability to accelerate the rate of economic growth
 Reasonable relationship exists between..Prices…
income…money supply