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´Monetary policy is essentially a
programme of action undertaken by
the monetary authority, generally the
central bank, to control and regulate
the supply of money with the public
and the cash flow of credit with a view
to achieving predetermined
macroeconomics goals.µ
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‡ rowth
‡ Employment
‡ Stability of prices
‡ Foreign exchange
‡ Balance of payments
equilibrium
 





 



£ Open market £ Credit rationing

operation B Change in
B Discount rate or lending margins
bank rate C Moral suasion
C Cash reserve D Direct control
ratio
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‡ ÿhe open market is sale and
purchase of government
securities and treasury bills by
the central bank of the
country.
‡ ÿhe RBI carries out its
operations through
commercial banks-it does not
deal directly with the public.
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‡ Àhen people buy the govt bonds
and securities through the
cheques drawn on the
commercial banks in favour of the
central bank.
‡ Àhen the commercial banks
decide to buy to the govt bonds
and securities themselves ,their
cash reserves go down¦
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‡ Excess liquidity
‡ Depression
‡ Underdeveloped
countries
‡ Popularity of govt. bonds
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ÿhe RBI £ct 1935 defines ¶bank
rate· as the ´standards rate at
which (the bank is prepared
to buy or discount bills of
exchange or other
commercial papers eligible for
purchase under this actµ
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‡ Only Àhen commercial banks
approach the central bank for
borrowing its effective.
‡ Capital market has widened
extensively.
‡ Demand for credit is interest-
elastic.
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‡ ÿhe CRR is the percentage

of total deposits which
commercial banks are
required to maintain in the
form of cash reserves with
the central bank
‡ Example
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In order to curb the extensive
credit which is being given to the
strong sectors, the central bank
resorts to the credit rationing
measures.
a imposition of upper limits
b charging a higher interest
rate.
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ÿhe gap between the
value of mortgaged
property and the
amount advanced is
called lending margin¦
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It is a method of persuading
and convincing the
commercial banks to advance
credit in accordance with the
directives of the central banks
in overall economic interest of
the country.
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