SRI VENKATESWARA UNIVERSITY

DEPARTMENT OF MANAGEMENT STUDIES

BANK MANAGEMENT
SEMESTER-III
A REPORT
ON
RBI – MONETARY POLICY
BY
M.VENKATA VINAY KUMAR REDDY
REGD NO: 1982263071

SUBMIT TO
Prof. M.SRINIVASA REDDY SIR
 MONETARY POLICY

CONTENTS

 MEANING AND DEFINITION OF MONETARY POLICY.

 OBJECTIVES OF MONETARY POLICY.
 FUNCTIONS OF MONETARY POLICY.
 MONETARY POLICY FRAME WORK.
 MONETARY POLICY COMMITTEE.
 MONETARY POLICY PROCESS.
 INSTRUMENTS OF MONETARY POLICY.
 CONCLUSION.

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MEANING OF MONETARY POLICY:-

➢ Under the terms of the RBI Act, this monetary policy was
developed in 1934.
➢ This strategy, which can be either contractionary or
expansionary.
▪ Expansionary policy is used when there is a
sudden increase in the overall amount of
money.
▪ Contractionary policy is used when there is a
slower rate of growth or decline in the money
supply.
➢ The central bank uses monetary policy, a procedure, to
control the money supply in order to accomplish particular
objectives including preventing inflation, preserving a fair
exchange rate, generating employment, and fostering
economic progress.
➢ Changing interest rates through open market operations,
reserve requirements, or foreign exchange trading is part of
monetary policy, whether it be directly or indirectly.
➢ Conducting monetary policy is the responsibility of the
Reserve Bank of India (RBI). The Reserve Bank of India Act,
1934 specifically mandates this obligation.
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DEFINITION OF THE MONETARY POLICY:-

❖ Monetary policy is the policy adopted by the monetary

authority of a nation to control either the interest rate
payable for very short-term borrowing(borrowing by banks
from each other to meet their short term needs)or money
supply, often as an attempt to reduce inflation or the
interest rate , to ensure price stability of the nation’s
currency.

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OBJECTIVES OF MONETARY POLICY

RBI’S MONETARY POLICY OBJECTIVE:-

“…the primary objective of monetary policy is to maintain price
stability while keeping in mind the objective of growth.”
-Preamble to the
Reserve Bank of India Act 1934
▪ To maintain price stability is a necessary precondition to
sustainable growth.
▪ To keep stability In line with growth objective.
MONETARY POLICY OBJECTIVES:-
The main objectives of the monetary policy are to boost economic
growth, price and exchange rate stability. Some other objectives
of the monetary policy of India, as expressed by RBI are as follows:
• Promotion of saving and investment.
• Exchange Stability.
• Managing business cycles.
• Regulation of aggregate demand.
• Assigning more credit for the priority segments.
• Reducing rigidity.
• Full Employment.
• Economic Growth.

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• Price Stability.
• Stability in the Balance of Payments.
• Managing and developing the banking sector.
• Restriction of inventories and stock.

1. Promotion of saving and investment: Monetary policy

governs the rate of interest and inflation within India, hence,
it does have an impact on the savings and investments of the
people. Higher rates of interest increase the chances greatly
of savings and investment, thereby, preserving a healthy cash
flow within India's economy.
2. Exchange Stability: The conventional goal of monetary policy
lity. One of the key goals of the Golnations was this .These
movements served to automatically adjust any imbalances or
changes to the amount of money. Unpredictability in the
conversation rates will result in gold withdrawals or inflows,
upsetting the undesirable payment balance. As a result,
stable currency rates are crucial for international trade.
Therefore, the main goal of monetary policy is to stabilize
and manage the external changes that are occurring in a
nation. Avoiding factors that could lead to exchange rate
instability is crucial.
3. Managing business cycles: Boom and depression are the two
primary stages of a business cycle. Thus, monetary policy acts
as the greatest tool with which the boom and depression of
business cycles can be controlled by managing the credit in
order to control the supply of money. Inflation in the market
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is generally controlled by decreasing the supply of money. On

the other hand, as the money supply increases, demand in
the economy also rises.
4. Regulation of aggregate demand: Since the demand in an
economy can be controlled by monetary policy, the policy
can also be used by monetary authorities to retain a balance
between demand and supply of goods and services. As credit
gets expanded and the rate of interest reduces, it enables
more people to secure loans for purchasing goods and
services. This leads to a rise in demand, and on the other
hand, when authorities desire to reduce demand, they can
reduce credit and raise interest rates.
5. Assigning more credit for the priority segments: Under the
monetary policy, the extra funds get allocated at lower rates
of interest for developing the priority sectors like small-scale
industries, agriculture, underdeveloped sections of society,
etc.
6.Reducing rigidity: RBI endeavours to bring more flexibilities
in operations which provide considerable autonomy. It
encourages a more competitive environment and
diversification. RBI also maintains control over the financial
system whenever required to maintain discipline and
prudence in the operations of the financial system.
7. Full Employment: According to the economist, having a
balance between saving and investment at the full
employment level is the essential factor in achieving full
employment. According to classical economists, full
employment is a typical aspect of the economy, but in the
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current environment, it cannot be fully utilized; as a result,

full employment is necessary for better improvement of the
nation’s economic status. They also consider those who
worked for a period of time before losing their position to be
employed.
Following the completion of the goal of full employment,
monetary policy must work toward price balancing. Some of
the ways the policy can be applied are listed below:
• Given that disguised unemployment is on the rise in
countries like India, monetary policy is more appropriate for
nations like ours.
• The policy can address the genuine unemployment issue,
which will fuel the nation’s brisk economic expansion.
• It is one of the most practical tools for promoting the
community’s economic and social welfare.
8.Price Stability: One of the main goals of monetary policy, it
has received significant attention in the twenty-first century.
The most reliable and significant goal of monetary policy is
price stability.
• Prices that remain steady boost public trust and eliminate
cyclical volatility. Thus, it promotes economic equality and
helps people appreciate the importance of business activity.
As a result, the community experiences an overall wave of
welfare and wealth that is beneficial to everyone.
• Additionally, price stability promotes the improvement of the
nation’s economic situation. Additionally, the growth in good
output benefits both the nation and its citizens. Additionally,
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it raises imports while lowering exports. Following the

introduction of the monetary policy, certain slight price
increases also aid the successful operation of the nation’s
economy.
• 9.Stability in the Balance of Payments: Another goal of
monetary policy is the balance of payments. It was first made
available after the war. This monetary policy objective’s
primary goal stems from the problem with global trade’s lack
of international liquidity. It was believed that the increase in
the payment balance deficit was decreased. Many less
developed nations reduce their imports, which negatively
impacts the economy and development of the nation.
Consequently, this goal brings about a balance in the
payments.
• 10.Managing and developing the banking sector: The
Reserve Bank of India (RBI) manages the entire banking
industry. Aiming to make banking facilities available across
the whole nation, RBI also demands other banks use the
monetary policy for establishing rural branches wherever
necessary for agricultural development. Moreover, the
government also has set up regional rural banks along with
cooperative banks to assist farmers to receive the financial
aid they require.
• 11.Restriction of inventories and stocks: Overloading of
stocks and products that are becoming outdated due to
excess stock usually results in the sickness of the unit. Thus,
to avoid this problem, RBI carries out an essential function of

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restricting inventories. The primary objective of this policy is

to avoid overstocking and idle money in the organisation.
SYSTEM TO MEET THE OBJECTIVES
• Statutory basis was provided for the implementation of the
flexible inflation targeting framework.
• Government of India sets inflationary targets in consultation
with RBI.
• Central government notified that 4%consumer price index
(CPI) inflation as the target for period from August 5,2016 to
March 31,2021.
upper tolerance limit of 6%.
lower tolerance limit of 2%.
• The Central Government retained the inflation target and the
tolerance band for the next 5-year period – April 1, 2021 to
March 31, 2026.
• Failure to achieve the inflation target
When average inflation rate is more than the upper
tolerance level of the inflation
Target for any three consecutive quarters.
when average inflation rate is less than lower tolerance
level for any three consecutive
quarters.
FUNCTIONS OF MONETARY POLICY

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I. Monetary policy should try to maintain in the economy a

most suitable interest rate structure. At present the
interest structure is amendable only in the upward direction
and very little in the downward direction, but with the help
of monetary policy the structure becomes somewhat
manageable in the downward direction also. For a large
public debt that has to be raised in poor economies, rates of
interest must be kept low.
II. Monetary policy can be of great use in these economies for
effecting necessary adjustment between the demand for and
supply of money. The demand for money is likely to go up on
account of increased transactions and gradual disappearance
of non-monetized sector combined with increased demand for
money on account of precautionary and speculative motives.
The use of money and credit for speculative purposes has to
be controlled by the monetary authorities through suitable
monetary policy and by the government through direct
physical controls, failing which, inflation is likely to appear,
which may stifle growth instead of helping it.
III. Monetary policy can, perhaps, be more useful in influencing
the pattern of investment and production by controlling the
provision of credit by banks. It can induce the banks to
advance medium-term and long-term loans of productive
nature at the same time prohibiting them to advance loans of
unproductive and speculative nature.
IV. Monetary policy can help in the expansion of financial
institutions by granting subsidies and special facilities to new
institutions and provision of training facilities for their staff. In
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most of the underdeveloped countries the credit system is

restricted to providing credit for large estates, plantations and
to foreign traders, and are not available to farmers, small
traders and industries . In such a situation an extension of
commercial bank, co-operative bank and savings bank
facilities can encourage development and mobilize savings for
productive purposes. Therefore, it is said that the creation and
mobilization of real savings—the most important condition for
growth—is helped or hindered by monetary policy and by the
development of financial institutions.
V. Monetary policy can prove more effective through selective
credit control. Poor economies are extremely inflation-
sensitive on account of speculation in commodities that are in
short supply, like wheat and rice. This speculation is done
mostly by borrowed funds got from the banks. Monetary
policy can be made use of to stop borrowing for speculative
purposes and to divert them for productive purposes.
VI. Monetary policy can also help growth. The sectoral impacts of
such policy in a developing economy are worth noting.
Monetary expansion can be used, at least in theory, to change
the terms of trade against the agricultural sector, which tends
to benefit from increased production in the secondary or
tertiary sectors. If the prices of industrial goods can be raised
through inflation without affecting the prices of food-stuffs
and raw materials, it may prove useful for growth but in actual
practice it may be difficult to follow.
VII. Monetary policy in a developing economy should also be
concerned with the balance of payments problem. When a
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country starts developing, its balance of payments may

become adverse on account of various reasons. Under such
circumstances, besides, exercising direct controls on foreign
exchange, the monetary authority can help in turning the
balance of payments favourable by using the traditional
methods of control, like raising the bank rate, etc.
MONETARY POLICY FRAME WORK
❖ RBI act was amended in 2016 to provide a statutory and
institutionalized framework for monetary Policy Committee
providing the legislative mandate to our RBI on monetary
policy framework.
❖ The framework aims at
• Setting the policy (repo) rate based on an assessment of the
current and evolving macroeconomic situation.
• Modulation of liquidity conditions to anchor money market
rates at or around the repo rate.
❖ Announcement of Repo rate : weighted average call rate is
around the repo rate.
❖ The operating framework is fine-tuned and revised ensuring
consistency with the monetary policy stance depending on
the evolving.
Financial market conditions.
Monetary conditions.

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MONETARY POLICY COMMITTEE

Monetary Policy Committee members:-

Comprises of RBI governor as a chair person in 5 members
nominated (3 by RBI and 2 by Government of India.
RBI Officials:-
1. Governor of the reserve bank of India – chairperson.
2. Deputy Governor of the bank, member Ex officio.
3. One officer of the Reserve Bank of India to be nominated by
the Central Board –member.
Academicians:- 3 Members - Hold the office for 4 years.
1. Prof. Ashima Goyal, Professor, Indira Gandhi Institute of
Development Research —Member;
2. Prof. Jayanth R. Varma, Professor, Indian Institute of
Management, Ahmedabad—Member; and
3. Dr. Shashanka Bhide, Senior Advisor, National Council of
Applied Economic Research, Delhi—Member.

RULES FOR MONETARY POLICY COMMITTEE

I. Monetary Policy Committee (MPC): Frame policy and meet
at least 4 times in a year.
II. Monetary Policy Department (MPD): Assist MPC.
III. Financial Markets Committee (FMC): Meet daily.
Purposes of Monetary Policy Committee
a. To maintain price stability.
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b. Entrusted to fix repo rate.

MONETARY POLICY PROCESS

The Reserve Bank has notified Reserve Bank of India Monetary

Policy Committee and Monetary Policy Process Regulations, 2016
which came into effect from August 01, 2016. In terms of
Regulation 5 of these regulations ibid., the Monetary Policy
Process consists of the following:

a) Meeting schedule :- The schedule of monetary policy

voting/decision meetings for the entire fiscal year is announced in
advance.

b) Meeting notice:- Ordinarily, not less than fifteen days’ notice is

given to members for meetings of the Committee. Should it be
found necessary to convene an emergency meeting, 24 hours’
notice is given to every member to enable him/her to attend, with
technology enabled arrangements for even shorter notice period for
meetings.

c) Meeting duration:- The duration of monetary policy meetings is

as decided by the Committee. The policy resolution is publicly
released after the conclusion of the MPC meeting keeping in view
the functioning and timing of financial markets.
• The Reserve Bank’s Monetary Policy Department (MPD)
assists the MPC in formulating the monetary policy.
• The MPC in its meetings reviews the surveys conducted by
the Reserve Bank to gauge consumer confidence, households’
inflation expectations, corporate sector performance, credit
conditions, the outlook for the industrial, services and
infrastructure sectors, and the projections of professional
forecasters.
The MPC also reviews in detail the staff’s macroeconomic
projections, and alternative scenarios around various risks to the
outlook. Drawing on the above and after extensive discussions on
the stance of monetary policy, the MPC adopts a resolution.
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d) The MPC Resolution :- The Bank publishes, after the conclusion

of every meeting of the MPC, the resolution adopted by the said
Committee. The resolution includes the MPC’s decision on the
policy repo rate.

e) Minutes of the MPC Meeting:- On the 14th day after every

meeting of the MPC, the minutes of the proceedings of the MPC
are published which include: (a) the resolution adopted by the
MPC; (b) the voting of each member on the resolution; and (c)
short written statements of individual members justifying the vote,
consistent with the provisions of Section 45ZL of the RBI Act.
Minutes shall be released at 5 pm on the 14th day from the date of
the policy day (or next earliest working day).
f) The Monetary Policy Report:- Once in every six months, the
Reserve Bank publishes the Monetary Policy Report containing the
following elements:

a) Explanation of inflation dynamics in the last six months and the

near term inflation outlook;

b) Projections of inflation and growth and the balance of risks;

c) An assessment of the state of the economy, covering the real

economy, financial markets and stability, fiscal situation, and the
external sector, which may entail a bearing on monetary policy
decisions;

d) An updated review of the operating procedure of monetary

policy; and

e) An assessment of projection performance.

INSTRUMENTS OF MONETARY POLICY

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There are several direct and indirect instruments that are

used for implementing monetary policy. They are
• REPO RATE:- The (fixed) interest rate at which the Reserve
Bank provides overnight liquidity to banks against the
collateral of government and other approved securities
under the liquidity adjustment facility (LAF).
• REVERSE REPO RATE:- The (fixed) interest rate at which the
Reserve Bank absorbs liquidity. On an overnight basis, from
banks against the collateral of eligible government
Securities under LAF.
• Marginal Standing Facility (MSF) Rate :- The penal rate at
which banks can borrow, on an overnight basis, from the
Reserve Bank by dipping into their Statutory Liquidity Ratio
(SLR) portfolio up to a predefined limit (2 per cent). This
provides a safety valve against unanticipated liquidity shocks
to the banking system. The MSF rate is placed at 25 basis
points above the policy repo rate.
• Standing Deposit Facility (SDF) Rate :- The rate at which the
Reserve Bank accepts uncollateralised deposits, on an
overnight basis, from all LAF participants. The SDF is also a
financial stability tool in addition to its role in liquidity
management. The SDF rate is placed at 25 basis points below
the policy repo rate. With introduction of SDF in April 2022,
the SDF rate replaced the fixed reverse repo rate as the floor
of the LAF corridor.
• Bank Rate :- The rate at which the Reserve Bank is ready to
buy or rediscount bills of exchange or other commercial
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papers. The Bank Rate acts as the penal rate charged on banks
for shortfalls in meeting their reserve requirements (cash
reserve ratio and statutory liquidity ratio). The Bank Rate is
published under Section 49 of the RBI Act, 1934. This rate has
been aligned with the MSF rate and, changes automatically as
and when the MSF rate changes alongside policy repo rate
changes.
• Cash Reserve Ratio (CRR) :- The average daily balance that a
bank is required to maintain with the Reserve Bank as a per
cent of its net demand and time liabilities (NDTL) as on the last
Friday of the second preceding fortnight that the Reserve Bank
may notify from time to time in the Official Gazette.
• Statutory Liquidity Ratio (SLR) :- Every bank shall maintain in
India assets, the value of which shall not be less than such
percentage of the total of its demand and time liabilities in
India as on the last Friday of the second preceding fortnight,
as the Reserve Bank may, by notification in the Official
Gazette, specify from time to time and such assets shall be
maintained as may be specified in such notification (typically
in unencumbered government securities, cash and gold).
• Marginal cost of funding based lending rate (MCLR) :- The
penal rate at which banks can borrow, on an overnight basis,
from the Reserve Bank by dipping into their Statutory Liquidity
Ratio (SLR) portfolio up to a predefined limit (2 per cent). This
provides a safety valve against unanticipated liquidity shocks
to the banking system. The MSF rate is placed at 25 basis
points above the policy repo rate.

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• Main Liqudity Management Tool:- A 14-day term repo/reverse

repo auction operation at a variable rate conducted to
coincide with the cash reserve ratio (CRR) maintenance cycle
is the main liquidity management tool for managing frictional
liquidity requirements.

• Open Market Operations (OMOs) :- it is the role of RBI to bring

financial market equilibrium and price stability or inflation.
OMOs is one tool to perform this activity in
1.Forex market.
2.Money market.
3.Debt market.
• Liquidity Adjustment Facility (LAF) :- The LAF refers to the
Reserve Bank’s operations through which it injects/absorbs
liquidity into/from the banking system. It consists of overnight
as well as term repo/reverse repos (fixed as well as variable
rates), SDF and MSF. Apart from LAF, instruments of liquidity
management include outright open market operations
(OMOs), forex swaps and market stabilisation scheme (MSS).

• Market stabilisation scheme (MSS):- introduced in April 2004.

It is also known as Sterilization. Surplus liquidity of a more
enduring nature arising from large capital inflows is absorbed.
Through sale of short-dated government securities (G Secs)
and Treasury bills. Financial institutions on the major
participants in MSS. The money collected through MSBs has a
limit up to Rs.6 Lakh crore at and it will be with the RBI in
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governments account. The money will not be given to

government as it may lead again to excess of liquidity if
government spends.

• CARRIDOR :- the MSF rate and. Reverse repo rate determine

the corridor for the daily movement in the weighted average
call money rate.

• Credit Ceiling:- This particular monetary policy tool gives the

Reserve Bank of India access to advance knowledge regarding
bank lending up to a predetermined threshold. Consequently,
this forces the banks to give a specific loan to the industries.

Conclusion
So, you see, the role of RBI is not limited to its monetary policy.
It has a much bigger role to play in our economy. Yes, of
course, being the Central Bank of our country, its main object
is to control the money supply in the economy and keep
inflation at a healthy range so that economy can grow to its
full potential. RBI is the banker to Government of India. It
manages the revenue and expenditure of government, so that
it can focus on the social welfare and economic prosperity of
the country.

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