1. Monetary
Policy
Anuradha Kumari (1204)
Pankaj Agarwal (1215)
Srijita Dutta (1220)
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2. RBI
 It is the Central Bank of country.
 It was established in 1935 with a capital of Rs.5 crore.
 It was nationalised on january 1,1949.
Functions of Reserve Bank-
• Issue of Notes
• Banker to the government
• Banker’s Bank
• Controller of Credit
• Custodian of Foreign Reserves
• others
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3. Monetary Policy
Regulation of supply of money and cost and availability of credit in the
economy
Purpose of Monetary Policy
Maintain price stability, Higher rate of employment, ensure adequate flow
of credit to the productive sectors of the economy and overall economic
growth
Variables affected by Monetary Policy in the economy
Interest Rates
Liquidity
Credit Availability
Exchange Rates
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4. Monetary Policy – RBI’s role
Demand for Money Demand for goods/services
Instruments such as Ensuring price
CRR, OMO & Bank stability and
Rate ensuring savings
Control on money
supply, velocity of Control on bank
circulation of credit when
money during prices rise/fall
inflation
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5. Monetary Policy Instruments
 Bank rate
 Cash Reserve Ratio
 Statutory Liquidity Ratio
 Repo rate
 Reverse Repo rate
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6. Bank Rate
 Bank Rate is the rate at which RBI allows finance to commercial banks.
 Any upward revision in Bank Rate by central bank is an indication that
banks should also increase deposit rates as well as Prime Lending Rate.
 Thus any revision in the Bank rate could mean more or less interest on
deposits and also an increase or decrease in EMI.
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7. CRR(Cash Reserve Ratio)
 CRR is the amount of Cash(liquid cash like gold) that the banks have to
keep with RBI.
 This Ratio is basically to secure solvency of the bank and to drain out the
excessive money from the banks.
 RBI uses CRR either to drain excess liquidity or to release funds needed
for the economy from time to time.
 Increase in CRR means that banks have less funds available and money is
sucked out of circulation.
 Thus we can say that this serves dual purposes i.e. it not only ensures that a
portion of bank deposits is totally risk-free, but also enables RBI to control
liquidity in the system, and thereby, inflation by tying the hands of the
banks in lending money.
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8. SLR(Statutory Liquidity Ratio)
 SLR is the minimum percentage of deposits a commercial bank needs to
maintain in the form of cash, or gold or govt. approved securities (Bonds)
before providing credit to its customers.
 SLR rate is determined and maintained by the RBI (Reserve Bank of
India) in order to control the expansion of bank credit.
 Generally this mandatory ration is complied by investing in Govt bonds.
 In deficit Budgeting ,Govt. lending is more so they borrow money
from banks by selling their bonds to banks. So banks have invested more
than required percentage and use these excess bonds as collateral security (
over and above SLR )to avail short term Funds from the RBI at Repo rate.
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9. Repo And Reverse Repo Rate
Repo Rate Reverse Repo Rate
 It is the rate at which the RBI  It is the rate at which banks park
lends shot-term money to the their short-term excess liquidity
banks. When the repo rate with the RBI. The RBI uses this
increases borrowing from RBI tool when it feels there is too
becomes more expensive. much money floating in the
 Therefore, we can say that in banking system.
case, RBI wants to make it more  An increase in the reverse repo
expensive for the banks to rate means that the RBI will
borrow money, it increases the borrow money from the banks at
repo rate; similarly, if it wants to a higher rate of interest. As a
make it cheaper for banks to result, banks would prefer to
borrow money, it reduces the keep their money with the RBI
repo rate
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10. Cu Current Rates
Bank Rate • 8.5%
CRR • 4.0
SLR • 23.0%
Repo Rate • 7.5%
Reverse Repo Rate • 6.5%
Re/$ • 54.38
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11. Monetary Policy-
Expansionary/Contractionary Policy
Monetary policy is the process by which the monetary authority of a country
controls the supply of money, often targeting a rate of interest to attain a set of
objectives oriented towards the growth and stability of the economy.
Monetary policy is referred to as either being an expansionary policy, or
a Contarctionary policy.
 Expansionary policy increases the total supply of money in the economy
rapidly.
 Expansionary policy is used to combat unemployment in a recession by
lowering interest rates.
 Contarctionary policy decreases the total money supply, or increases it
slowly.
 Contarctionary policy involves raising interest rates to combat inflation.
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12. Expansionary Monetary Policy
 When the Open Market Committee wishes to increase the money supply, it
can do a combination of three things:
 Purchase securities on the open market, known as Open Market
Operations
 Lower the Discount Rate (Repo & Reverse Repo Rate)
 Lower Reserve Requirements (CRR & SLR)
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13. Contd..
 Expansionary monetary policy causes an increase in bond prices and a
reduction in interest rates.
 Lower interest rates lead to higher levels of capital investment.
 The lower interest rates make domestic bonds less attractive, so the
demand for domestic bonds falls and the demand for foreign bonds rises.
 The demand for domestic currency falls and the demand for foreign
currency rises, causing a decrease in the exchange rate. (The value of the
domestic currency is now lower relative to foreign currencies)
 A lower exchange rate causes exports to increase, imports to decrease and
the balance of trade to increase.
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14. Effects of Monetary Policy on Economy
 Erratic increase or decrease in prices of commodities or other items, if
continued unabated for a substantial period, can be a source of imbalance in
the economy.
 While framing monetary policies, the fundamental objective of central
banks all over the world is to maintain price stability.
 Price stability is directly related to demand and supply of the products
besides the available money supply.
 By using monetary policy tools, the central banks ensure that money supply
is controlled in a manner such that the aim of sustainable economy is
achieved.
(Sustainable Economy=Maximum Employment+ Stable Prices+ Growth).
.
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15. Impact on Inflation
 SLR &CRR is maintained for bank solvency and higher ratio of SLR and
CRR makes bank relatively safe as higher ratio means they have more of
their funds deposited in liquid securities and can fulfill the demand on
redemption of deposit from the Bank.
 When an economy grows too fast and there is too much growth, it can lead
to inflation (more money in the market→ people consuming more→
higher prices→ inflation).
 If inflation is an imminent danger, central bank will hike interest rates so
that there is decrease in money supply (if interest rates are hiked, people
will save more and spend less so that they can get better returns on their
investments).
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16. Contd..
 When RBI increases these ratios then money supply in market decreases
and inflation falls.
 The Increase in CRR will squeeze money from market so less money will
chase few things means less demand so it will reduce Inflation.
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17. How rate hike affects inflation rate?
17
Source:The
RisksBank
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18. Change in Repo rate impacts on Inflation Rate
9 9
8
7
7.5
6
Borrowing rate(repo
5
6 rate%) are nearly 3%
4
higher than two years
3
4.5 ago.
2
1
3 0
Reverse repo
rate
Provisional annual inflation
rate based on all India general
CPI
(Combined) for February 2013
on point to point basis
(February 2013 over February
2012) is 10.91% as compared
to 10.79% (final) for the
previous month
of January 2013.
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19. GDP growth
and
industrial
production
has fallen in
last two
years.
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20. Impact on Interest rates of these ratios
 Interest rate are fixed on the demand supply situation of the amount
available with person who want to lend and person who want to borrow.
 If demand is more and supply is less then interest rate rises up and if
demand is less and supply is excessive then interest rate comes down.
 RBI increase these ratio(CRR & SLR) then available funds with the banks
will go down and as demand remain the same then people will have to pay
more as interest and interest rate will go up. & vice versa.
 So these rates have double impact :
1. Direct effect is bank increase rate of lending so less money is available with
people & vice-versa.
2. Interest on deposit will be increased so less money will be available with
the people & vice-versa.
 Some time region wise and seasonal or other factor also effect the decision
of Interest rate.
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21. Limitations – Monetary Policy
Cannot simultaneously stimulate economic demand to reduce unemployment
and restrain demand to combat inflation
Monetary policy is restricted by the impact of other government
actions, especially Fiscal policy, i.e. decisions about government expenditures
and taxation
Problems of an inflexible labour market, inadequate infrastructure and, most
important, fiscal policy whose discipline is open to question limits the
effectiveness of the Monetary policy
Monetary Policy cannot work in isolation!!
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22. Mid-Quarter Monetary Policy Review:
19th March 2013
 Growth has decelerated significantly below trend through 2011-12 and
2012-13 so far and overall economic activity remains subdued.
 On the demand side, investment activity has been way below desired levels
and consumption demand has started to decelerate.
 On the supply side, constraints in the availability of key raw materials and
intermediates are becoming binding. In turn, this is being reflected in a
widening of the CAD with adverse implications for external sustainability.
 While the monetary policy stance has sought to balance the growth-
inflation dynamic through calibrated easing, it is critical now to arrest the
loss of growth momentum without endangering external stability.
 The moderation in inflation conditions provides the opportunity for
monetary policy to act in conjunction with fiscal and other measures to
stem the growth risks.
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23. Monetary Measures Taken
 Reduced the policy repo rate under the liquidity adjustment facility (LAF)
by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect.
 Consequently, the reverse repo rate under the LAF stands adjusted to 6.5
per cent
 Bank Rate reduced to 8.5 per cent.
 CRR which was reduced by 25 basis point in Jan. to 4 per cent remains the
same.
 Since the Reserve Bank’s Third Quarter Review (TQR) of January
2013, global financial market conditions have improved.

24. Monetary and Liquidity Conditions
 Money supply (M3) and bank credit growth have broadly moved in
alignment with the revised indicative trajectories.
 With government cash balances with the Reserve Bank persisting at a
higher than normal level, the liquidity deficit, as reflected by the net drawls
by banks under the liquidity adjustment facility (LAF), has remained
above the indicative comfort zone.
 The reduction in the cash reserve ratio (CRR) of banks by 25 basis
points, effective from February 9 and open market purchases of `200
billion since February have enabled money market rates to remain
anchored to the policy repo rate.
 The Reserve Bank will continue to actively manage liquidity through
various instruments, including open market operations (OMO), so as to
ensure adequate flow of credit to productive sectors of the economy.
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25. Expected Outcomes
 It is expected that RBI policy actions and the guidance given, will result in
the following three outcomes:
1. Investment will be encouraged, thereby supporting growth
2. Medium-term inflation expectations will remain anchored on the basis of
a credible commitment to low and stable inflation
3. There will be an improvement in liquidity conditions to support credit
flow.
Bankers indicated that they would cut lending and deposit rates over next
couple of days to the benefit of borrowers, though depositors may get lesser
returns. The industry too appeared satisfied with the rate cut hoping that it
would boost demand and promote growth.
* CRR cut to infuse Rs 18,000 crore in system which is effective from Feb
9,2013.
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26. Comments...
 Commenting on the policy action, Commerce and Industry Minister Anand
Sharma said: "It is a positive step which will infuse liquidity and help in
catalysing growth.“
 Planning Commission Deputy Chairman Montek Singh Ahluwalia said the
CRR cut will have impact on long term interest rates."I think this is the
right thing to do at this point of time given that (the decline) in economy is
beginning to bottom out," he said.

27. Outlook
 The foremost challenge for returning the economy to a high growth
trajectory is to revive investment. A competitive interest rate is necessary
for this, but not sufficient.
 Sufficiency conditions include bridging the supply constraints, staying the
course on fiscal consolidation, both in terms of quantity and quality, and
improving governance.
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28. Source
 www.rbi.org.in
 http://www.simpletaxindia.net/2008/11/what-is-crrrepo-rateslr-how-it-
effects.html#ixzz2P22kCYuK
 http://www.buzzle.com/articles/how-does-monetary-policy-affect-
the-economic-growth.htm
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29. Thank You
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