a brief about the monetary policy of India. An introduction

1. UNIT 3
MONETARY POLICY

2. MONETARY POLICY
It refers to the credit control measures adopted by the Central
Bank RBI of India.
It is formulated and executed by RBI in India
It controls the supply of the money & to regulated credit of the
country.

3. Objectives of the monetary policy
• Full employment
• By providing concessional loans to productive sectors, small medium . Special
loan scheme for unemployed youth.
• Price stability
• It implies control over inflation, wide fluctuations in price presented by
increasing creating & expanding money supply in the country.
• Balance of payments
• By providing concessional loans to export erected & import substitution units.
• Control of business cycle.
• Booms & depressions are main phases of the business cycle. During boom
phase price council is controlled so as to reduce money supply and in
depression phase the credit is expanded, to increase money supply.

4. Instruments of Monetary policy
•Quantitative
•Qualitative

5. Quantitative Measures
• Bank rate
• It is the rate at which central bank gives credit to the commercial banks.
Increasing bank rate will reduce borrowings by the commercial bank in which
return contract the money supply & thus check inflation.
• Similarly bank rate is decreased to provide credit to the commercial banks &
expand the money supply in the country
• Open market operations
• It refers to the purchase & sale of government securities in the open market
by commercial banks & general public. In order to contract the money supply
securities are sold to the commercial bank and general public which are
purchased by the central bank for the flow of the money supply in the
country.

6. • VRR-Variable reserve ratio
• CRR- Cash Reserve Ratio refers to the minimum cash balance which a
commercial bank has to keep with the central bank.
• SLR-Statutory liquidity ratio refers to the maintenance of minimum cash
balance which commercial bank has to surplus fund itself.
• If SLR is more banks will have less surplus fund for granting loans & thus help
to control money supply in the market.
• It SLR is fewer then banks will have more funds to grant loans & thus expand
the money supply in the market
• Multiple rate of interests
• Under this programme RBI gives credit quota for various commercial banks. If
commercial banks borrow funds from RBI in their quota , then they charge
interest at the bank rate.
• If the commercial banks borrow loans more than their fixed quota then they
are charged with higher interest rate i.e more than bank rate,

7. QUALITATIVE MEASURES
• Change in margin requirement of loan
• Margin is difference between loan value & market value securities. It is fixed by RBI
for different types of loans, margin requirement.
• If margin % is more then fewer loans will be given for certain value of security & if
margin % is less then more loans can be given.
• Moral persuasion
• RBI can also exercise moral influence upon the member banks with a view to
purchase its monetary policy.
• RBI convinces commercial banks to restrict loans to unproductive sectors.
• Direct action
• RBI can stop any bank from any type of transaction. In case of defiance of orders RBI
can take direct action.
• Ceiling on loans