MONETARY POLICY

Presentation
By

Sumant M. A.
M.Com Ist Sem
 MONETARY POLICY

It is a policy statement, through which RBI targets a

key set of indicators to ensure price stability in the
economy.
IMPORTANT OBJECTIVES
 To ensure the economic stability at
potential level of output or employment.
 To achieve price stability by controlling
inflation and deflation.
 To promote and encourage economic
growth in the economy.
 Exchange Rate Stability
 MONETARY POLICY
• It is concerned with changing the supply of money stock
and rate of interest for the purpose of stabilizing the
economy at full employment or potential output level by
influencing the level of aggregate demand.

• At times of recession - increases the money supply and

lowers interest rate - to stimulate aggregate demand in
the economy.

• At the time of inflation - tightening the money supply or

raising the rate of return.
 Money Supply
the total stock of money which
is in circulation in an economy
at any given point of time. It
implies the total stock of money
held by the public
 Money Supply
• Money is a stock as well as a flow concept
• When money supply is viewed at a given
point of time, it is a stock.
• It consists of total currency notes, coins
demand deposits (deposits in saving account
and current accounts) with the bank held by
the public.
• When money supply is viewed over a period of
time, money supply becomes a flow concept.
• Here money may be spent several times during
a given time period, passing from one hand to
another.
• The average number of times a unit of money
circulating from one hand to another in the
process of spending during a given year is called
as the ‘velocity of circulation of money

• The flow of money supply over the period of time

can be calculated by multiplying stock of money
held by the public (M) by the velocity of
circulation of money (V)

• The flow of money supply as given by

Fisher is : MV
Definition of Money
Supply in India

• Based on two fundamental functions of

money viz. medium of exchange and store of
value, the reserve bank of India has adopted
four measures of money supply expressed as
M1, M2, M3 and M4
Concept of M1

M1 is referred as ‘narrow money” it is measured as

follows:
M1 = C + DD + OD
C = currency with the public || DD = demand deposits
with banks || OD = other deposits held with the Reserve
Bank of India

This can be easily controlled by the central bank.

Money Aggregates Old Series

Concept of M2
• M2 is a broader concept defined as

• M2 = M1 + saving deposits with post office

• Post office saving banks is not as liquid as demand

deposits with banks (commercial or cooperative) as
they are not chequeable account. However, saving
deposits with post office are more liquid than time
deposits with the bank.

Money Aggregates Old Series

Concept of M3:

M3 is again a broad concept of money supply defined

as

M3 = M1 + Time Deposits with Banks

M3 is also called as Aggregate Monetary Resources

( AMR )

Money Aggregates Old Series

 Concept of M4

• M4 is defined as

• M4 =M3 + Total Deposits with the Post Office Saving

Organization(excluding NSC)

• The Reserve Bank of India regards these four

measures of money supply i.e. M1, M2, M3 and M4 in
the descending order of liquidity.

Money Aggregates Old Series

Monetary Aggregates:
New Series
• RBI has revised monetary data since April 1992,
and since 1999, has started publishing the new
monetary aggregates, namely M0 ( monetary
base), NM1(Narrow money), NM2 ( Intermediate
monetary aggregate) and NM3 ( Broad money)
based on the residency concept.
• The new series clearly distinguishes between
monetary aggregates and liquidity aggregates.
NM1= Currency with public + Demand deposits
with the banking system + other deposits with
RBI + Demand liabilities portion of savings
deposits with the banking system

NM2= NM1 + time liabilities portion of savings

deposits with the banking system + certificates of
deposits issued by banks + term deposits of
residents with a contractual maturity upto and
including one year with the banking system

Monetary Aggregates: New Series

NM3= NM2+ Long-term deposits of residents +
Call/Term funding from financial institutions

NM1 includes only non-interest bearing assets,

monetary liabilities of the banking sector.
NM3, on the other hand, is an all encompassing
measure that includes long-term deposits.
NM2 is an intermediate monetary aggregate that
stands in between narrow money NM1 and Broad
money NM3.

Monetary Aggregates: New Series

Liquidity Indicators
The RBI compiles three different liquidity indicators
L1, L2 and L3.

L1 = NM3 + All deposits with the post office

savings banks ( excluding National Savings
Certificate)
Liquidity Indicators
L2 = L1+ Term deposits with term lending
institutions and refinancing institutions (FIs)
+ Term borrowing by FIs + Certificate of
deposits issued by FIs

L3 = L2 + Public deposits of non- banking

financial companies.
 TOOLS OF MONETARY POLICY

• Bank rate
• Open market operations
• Changing reserve ratio (CRR/SLR)
• Undertaking selective credit controls
 BANK RATE

• Bank rate is the minimum rate at which the

central bank of a country provides loan to the
commercial bank of the country.

• When central bank raises the bank rate, the

commercial bank raises their lending rates, it
results in less borrowings and reduces money
supply in the economy.
 LIMITATIONS

• Well organized money market should exist in

the economy.
• It is useful during the times of inflation but
not so during the time of recession or
depression.
 OPEN MARKET
OPERATIONS

• It means the purchase and sale of securities by

central bank of the country.

• The sale of security by the central bank leads

to contraction of credit and purchase there of
to credit expansion.
 LIMITATIONS
 The bank will expand and contract credit according to
prevailing economic and political circumstances and not
merely with reference to their cash reserves.

 When the commercial bank cash balance increases, the

demand for loan and advance should increase. This may
not happen due to economic and political uncertainty.

 The circulation of bank credit should have a constant

velocity.
 CHANGING THE CRR/SLR

• CRR - Scheduled banks are required to

maintain with the RBI an average cash balance,
the amount of which shall not be less than
certain % of the total of the Net Demand and
Time Liabilities (NDTL), on a fortnightly basis
• Increase in the CRR leads to the contraction of
credit
• Decrease in the CRR leads to the expansion of
credit and banks tends to make more money
available to borrowers.
 CHANGING THE CRR/SLR

• Statutory liquidity ratio (SLR) that the

commercial banks in India require to maintain
in the form of gold, government approved
securities before providing credit to the
customers.
• Increase in the SLR leads to the contraction of
credit
• Decrease in the SLR leads to the expansion of
credit and banks tends to make more money
available to borrowers.
 Selective Credit Control

• Rationing of credit
• Margin Requirement
• Variable interest rates
• Regulation of consumer credit
• Moral Suasion
EXPANSIONARY MONETARY POLICY
Problem: Recession and unemployment
Measures: (1) Central bank buys securities through
open market operation
(2) It reduces cash reserve ratio
(3) It lowers the bank rate

Money supply increases

Investment increases

Aggregate demand increases

Aggregate output increases by a

multiple of the increase in investment
 TIGHT MONETARY POLICY
Problem: Inflation
Measures: (1) Central bank sells securities through OMO
(2) It raises CRR and SLR
(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

MPC made effective on statutory basis on June 27,2016
Six Member Committee comprising of
3 from RBI
Governor – ex-officio Chairperson
Deputy Governor
One officer of RBI
3 Members experts in Economics, Banking, Finance,
Monetary Polciy
The committee aims at controlling the inflation rate

New Era in Indian Monetary Policy

Monetary Policy Committee
• MPC decided to increase the policy repo rate by 25 basis
points
• MPC is committed to 4% inflation
• As published on 1st August ,2018

Third Bi-monthly Monetary

Policy statement 2018-19 by MPC
THANK U