Monetary Policy

First Quarterly for 2010-2011

 Meaning
• The process by which the 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
Objective Or Goals Of Monetary
Policy

• Full Employment

• Price stability

• Economic growth
 Types Of Monetary Policy
• Expansionary policy:
 Increases the total supply of money in the
economy
 Involves decreasing the interest rates to
pump liquidity in the market
 Government is using since October, 2008
 Types Of Monetary Policy
• Contractionary policy:
 Decreases the total money supply
 Involves raising interest rates in order to
combat inflation
 Government may use in near future
Instruments Of Monetary Policy
 Open Market Operation
• RBI undertakes to buy and sell Government
Securities from participants in the financial
markets
 Objectives
• To absorb or provide liquidity in the market
• To stabilize inflation
• To maintain a fixed exchange rate
 Foreign Currency Asset
• Foreign exchange reserves less gold
holdings
• Special drawing rights and
• India's reserve position in the IMF
 Cash Reserve Ratio

• The base is the total of the deposits that a

bank has
• The RBI pays the bank interest on the
amount parked with it
 Statutory Liquidity Ratio
• The amount that the commercial banks
require to maintain in the form of
 Cash
 Gold or
 Govt. approved securities before providing
credit to the customers
 Repurchase Rate

• Repo rate

• Discounted interest rate at which a central

bank repurchases government securities
 Reverse Repurchase Rate
• Applicable when a country's reserve
borrows money from banks
• fund shortage being faced by the reserve
• money to be taken out of the economic
system
 Bank Rate
• The Discount Rate
• The rate of interest which a central bank
charges on the loans and advances that it
extends to commercial banks and other
financial intermediaries
 Contents of Monetary Policy

I. The State of the Economy

II. Outlook and Projections

III. The Policy Stance

IV. Monetary Measures

 Current Monetary Policy
• Cash Reserve Ratio retained at 6.0 per
cent
• Repo Rate increase the repo rate to 5.75
per cent
• Reverse Repo Rate increase to 4.50 per
cent
• Bank Rate retained at 6.0 per cent
Thank you