monetary policies eco by vikas

8/7/2019 Monetary Policies Eco by Vikas

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Amity Business School

SUBMITTED BY:-

VIKAS DUBEY(B44)

SUNNY VERMA (B45)

ANMOL SINGH (B43)

RITU RAJ (B47)AMAN DATTA (B48)


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MONETARY POLICY

Monetary policy is the process by which thegovernment, central bank or monetary authority of acountry 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 thegrowth and stability of the economy. Monetary theoryprovides insight into how to craft optimal monetarypolicy.


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To ensure the economic stability at full

employment or potential level of output.

To achieve price stability by controlling inflationand deflation.

To promote and encourage economic growth inthe economy.


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Bank rate policy

Open market operations

Changing cash reserve ratio

Undertaking selective credit controls


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Bank rate is the minimum rate at which the

central bank of a country provides loan to the

commercial bank of the country.

Bank rate is also called discount rate because

bank provide finance to the commercial bank by

rediscounting the bills of exchange.

When general bank raises the bank rate, thecommercial bank raises their lending rates, it

results in less borrowings and reduces money

supply in the economy.


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Well organized money market should exist in the

economy.

It is use full during the times of inflation but itdoes not full fill its purpose during the time of

recession or depression.


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It means the purchase and sale of securities by

central bank of the country.

It is useful for the developed countries.

The sale of security by the central bank leads to

contraction of credit and purchase there of tocredit expansion.


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When the central bank purchases the securities thecash reserve of member bank will be increased andvise versa.

The bank will expand and contract credit according toprevailing economic and political circumstances andnot merely with reference to their cash reserves.

When the commercial bank cash balance increase thedemand for loan and advance should increase. This

may not happen due to economic and politicaluncertainty.

The circulation of bank credit should have a constant

velocity.


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The bank have to keep certain amount of bank moneywith them selves as reserves against deposits.

The increase in the cash rate leads to the contractionof credit only when the banks excess reserves.

The decrease in the cash rate leads to the expansion of

credit and banks tends to make more available to

borrowers.


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Problem: Recession and unemploymentMeasures: (1) Central bank buys securities

through open market operation(2) It reduces cash reserves ratio(3) It lowers the bank rate

Money supply increases

Investment increases

Aggregate demand increases

Aggregate output increases by amultiple of the increase in investment


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Problem: InflationMeasures: (1) Central bank sells securities

through open market operation

(2) It raises cash reserve ratioand statutory liquidity

(3) It raises bank rate(4) It raises maximum margin against

holding of stocks of goods

Money supply decreases

Interest rate raises

Investment expenditure declines

Aggregate demand declines

Price level falls


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Variable time lags concerning the effect of

money supply on the national income.

Treating Interest rate as the target of monetary

policy for influencing investment demand for

stabilizing the economy.


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Monetary policy and savings.

Monetary policy and investment.

Cost of credit.. Monetary policy and public investment.

Monetary policy and private investment.

Allocation of investment funds.


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In recent years starting from the mid-nineties

promoting economic growth is being given greateremphasis in monetary policy of RBI.

Three sub-periods:

Monetary policy of controlled examination(1951-1972).

Monetary policy in the pre-reforms period(1972-1991) .

Monetary policy in the post-reforms period(1991-2000).


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Reserve banks responsibility in the circumstances

is mainly to moderate the expansion of credit and

money supply in such a way as to ensure the

legitimate requirements of industry and trade and

curb the use of credit for unproductive andspeculative purposes.

To ensure controlled expansion, RBI used the

instruments:

Changes in bank rate

Changes in cash reserve ratio

Selective credit control


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Price situation worsened during the years of

1972-1974. to contain inflationary pressures RBI

further tightened its monetary policy.

It is similar to tight monetary policy.


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Liberal monetary policy adopted for encouraging

private sector since 1996.

Two instrument for monetary management BY RBIsince 1996:

Reactivation of bank rate.

Repo rate system .


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It is introduced through which RBI can add to liquidity

in the banking system. Through repo system RBI buys

securities from the bank and there by provide funds to

them.

Repo refers to agreement for a transaction between RBI

and banks through which RBI supplies funds

immediately against government securities and

simultaneously agree to repurchase the same or similar

securities after a specified time which may be one day

to 14 days.


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It is the another instrument of monetary policy from

June 2000 to adjust on a daily basis liquidity in the

banking system.

Through LAF, RBI regulates short-term interest rates

while its bank rate policy serves as a signaling devicefor its interest rate policy in the intermediate period.


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THANK

YOU !

monetary policies eco by vikas

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