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INTRODUCTION Amity Business School

• Monetary or credit policy refers to the various policy measures
pursued by the central bank to administer, control and regulate the
supply of money, foreign exchange rates, the cost and availability of
credit in a country.

• Monetary policy is one of the tools that a national Government uses

to influence its economy.

• Using its monetary authority to control the supply and availability of

money, a government attempts to influence the overall level of
economic activity in line with its political objectives.

• These objectives are low unemployment, low inflation, economic

growth, and a balance of external payments.
 Monetary Policy Amity Business School
Components
Reverse Bank Rate
Repo Rate

Monetary
policy

Cash Reserve Ratio Repo Rate

 TOOLS USED TO SIGNAL
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MONETARY POLICY
• Monetary policy is usually administered by a Government appointed
"Central Bank", the Bank of Canada and the Federal Reserve Bank in the
United States and the Reserve Bank of India in India.
The tools used by RBI to signal its monetary policy objectives are:
• CRR
• Repo rate
• Reverse repo rate

The Central Bank attempts to achieve economic stability by varying the

quantity of money in circulation, the cost and availability of credit, and the
composition of a country's national debt. The Central Bank has three
instruments available to it in order to implement monetary policy:
• Open market operations
• Reserve requirements
• The 'Discount Window'
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OBJECTIVES OF
MONETARY POLICY
The objectives are as follows:-
• Economic growth
• Full employment
• Price stability
• Interest rates
• Balance of payments
• Reduction in inequality and wealth
• Creation and expansion of financial institutes
 FUNCTIONS OF Amity Business School

RBI
The functions of the Reserve Bank are classified into:
1. Traditional functions
• Issue of Currency Notes
• Banker to other Banks
• Banker to the Government
• Exchange Rate Management
• Credit Control Function
• Supervisory Function

2. Development functions
• Development of the Financial System
• Development of Agriculture
• Provision of Industrial Finance
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• Provisions of Training
• Collection of Data
• Publication of the Reports
• Promotion of Banking Habits
• Promotion of Export through Refinance

3. Supervisory Functions
• Granting license to banks
• Bank Inspection
• Control over NBFIs
• Implementation of the Deposit Insurance Scheme
 MONETARY POLICY
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2010-11
Following are the highlights of the first quarter review of monetary policy for
2010-11 presented by Reserve Bank of India.
• Repo rate hiked by 25 basis points to 5.75 percent
• Reverse repo rate hiked by 50 basis points to 4.5 percent
• Cash reserve ratio unchanged at 6 percent
• Statutory Liquid ratio unchanged at 25 percent
• Bank rate unchanged at 6 percent
• Inflation outlook raised to 6 percent by the end of March 2011 from 5.5
percent projected earlier
• Growth in the gross domestic product is projected at 8.5 percent against 8
percent earlier.
• Monetary policy intended to inflation and anchor inflationary expectations
and respond to any further build-up of inflationary pressures
• Rate hike will help maintain financial conditions conducive to sustaining
growth
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 IMPLICATIONS OF MONETARY
POLICY ON CORPORATE Amity Business School

• Control Inflation
• Interest Rates
• Business Cycles
• Spending
• Employment
• Credit spreads over the business cycle
• Price stability
 Expected Outcomes Amity Business School

• Moderate inflation by reining in demand pressures and

inflationary expectations.
• Maintain financial conditions conducive to sustaining growth.
• Generate liquidity conditions consistent with more effective
transmission of policy actions.
• Reduce the volatility of short-term rates in a narrower
corridor.
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