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Monetary Policies Monetary policy is the process by which the govt.,

central bank, or monetary authority of a country

controls (i) the supply of money, (ii) availability ofmoney, and (iii) cost of money or rate of interest, inorder to attain a set of objectives oriented towardsthe growth and stability of the economy.

Monetary policy involves variations in money supply ,interest rates , lending by commercial banks etc.

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Instruments of Monetary Policy in India Money Supply

Bank Rate

Reserve Ratios Interest Rates

Selective Credit Controls

Flow of Credit

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Money Supply This is the sum total of money public funds and

can be used for settling transactions to buy

and sell things and make other paymentsconstitutes the money supply of a nation.

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Bank Rate Standard rate at which bank is prepared to buy or othercommercial papers eligible for purchase under Reserve bank ofIndia Act,1934.

The rate of interest charged by central bank on their loans tocommercial banks is called bank rate(Discount rate).

An increase in bank rate makes it more expensive for commercial

banks to borrow . This exerts pressure to bring about the rise ininterest rates (lending rates) charged by commercial banks ontheir lending to public. This leads to a general tightening ineconomy.

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RESERVE REQUIREMENTS

The reserve requirement (or required reserve ratio)is a bank regulation that sets the minimum reserveseach bank must hold to customer deposits andnotes. These reserves are designed to satisfywithdrawal demands, and would normally be in the

form of fiat currency stored in a bank vault(vaultcash), or with a central bank.

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RESERVE REQUIREMENTS Thus central bank makes it legally obligatory for

commercial banks to keep a certain minimumpercentage of deposits in reserve.

These are of 2 types:-

1. Cash reserves

2. Liquidity reserves

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CRR CASH RESERVE RATIO

THIS IS DEFINED AS A cash reserve ratio (or CRR) isthe percentage of bank reserves to deposits andnotes. The cash reserve ratio is also known as thecash asset ratio or liquidity ratio.

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STATUTORY LIQUIDITY RATIO Statutory Liquidity Ratio (SLR) is a term used in the

regulation of banking in India. It is the amount whicha bank has to maintain in the form:

Cash

Gold valued at a price not exceeding the currentmarket price,

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STATUTORY LIQUIDITY RATIO The quantum is specified as some percentage of the

total demand and time liabilities ( i.e. the liabilities ofthe bank which are payable on demand anytime, and

those liabilities which are accruing in one months'time due to maturity) of a bank. This percentage isfixed by the Reserve Bank of India. The maximum andminimum limits for the SLR are 40% and 25%respectively.

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The objectives of SLR are:

To restrict the expansion of bank credit.

To augment the investment of the banks in Governmentsecurities.

To ensure solvency of banks. A reduction of SLR rates lookseminent to support the credit growth in India.

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