The document discusses the concept of monetary policy, which is managed by central banks like the Reserve Bank of India to control money supply and credit in an economy. It aims to influence economic growth and inflation. The key tools of monetary policy include open market operations, adjusting policy interest rates like repo rates, and changing reserve requirements that commercial banks must maintain. Monetary policy can be expansionary to boost the economy or contractionary to curb inflation. It has a limited effect on variables like output and employment in the short-run.

1. Subject Expert
Ms.Anamika Jaiswal
Monetary Policy
BUSINESS ECONOMICS

2. Objective of the Study
 To understand the concept of Monetary
Policy
 To understand the impact of Taxation
policy on economy

3. Meaning of Monetary Policy
Monetary policy also known as the credit policy, is the
policy which is purely managed by our Central bank of
India (Reserve Bank of India) to control the money supply
in the economy & amount of credit in the economy.

4. Monetary Policy
 The central bank of any country designs
the monetary policy which affects bank
lending, interest rates, and financial capital
markets.
 A nation's legislative body determines
fiscal policy, which impacts the
government spending and taxes.

5. Basics of Monetary Policy
 Monetary policy involves changes in:
 Policy interest rates
 The Exchange rate
 The size of the monetary base
 The availability of credit
 To Influence:
 The level of growth of aggregate demand and output.
 To control inflation and deflation

6. Scope of Monetary Policy
 Monetary decisions take into account a wider
range of factors, such as:
 Short term and long term interest rates.
 Velocity of money.
 Exchange Rates
 Credit quality.
 International capital flow of money.
 Government Vs private sector Spending/Savings

7. Objectives of Monetary Policy
 Price stability
 Exchange Stability
 Neutrality of Money
 Economic Development

8. Functions of Monetary Policy
 Determining interest rates.
 Controlling the nation’s entire money.
 Managing foreign exchange, gold reserves and stock
register.
 Regulating and supervising the banking industry.
 Setting the official interest rate.

9. Difference between monetary and
fiscal policy
Monetary Policy Fiscal Policy
Tool Interest Rates Tax and government
Spending
Effect Cost of
borrowing/mortgages
Budget Deficit
Exchange rate Higher interest rates
cause appreciation
No effect on interest
rates
Supply side Limited Impact May effect incentives to
work
politics Set by central Bank Highly political
Liquidity Trap May not work in liquidity
trap
Advised in very deep
recession

10. Instruments of Monetary Policy
 DIRECT INSTRUMENTS
 Cash Reserve Ratio
Every bank Maintain a certain % of their total deposits with RBI in the
form of Cash and Net demand & Time liabilities.
 Statutory Liquidity Ratio (SLR)
Every bank has to maintain a certain % of their total deposits in the form
of (Gold + Cash + bonds + Securities) with themselves at the end of
every business days.

11. Instruments of Monetary Policy
 Indirect Instruments
 Bank Rate: Bank rate is also termed as “Discount Rate” The rate through which RBI
charges certain % for providing money to other banks without any security for Long
period of time for 90 Days & Current Bank Rate is 6.75%.
 MSF (Marginal Standing Facility); MSF is the rate through which bank can borrow
funds for Short time – Overnight basis. Current MSF is 6.75%.
 Repo Rate: Repo rate is the rate through which RBI lends money to commercial
bank with security for Short period of time in the event of short fall of funds. Current
Repo rate is 6.25%
 Reverse Repo Rate: Reverse Repo rate is the rate through which Commercial Bank
lends money to Central Bank of India i.e. RBI, for Short period of time. Current
reverse repo rate is 5.75%

12. Unconventional Instruments of
Monetary Policy
 Quantitative Easing: when central bank
buy other securities in the open market
outside of government bonds.
 NIRP( Negative interest rate policy): where
depositors end up paying institutions to
hold their deposits.
 Signaling: lower market expectations for
lower interest rates in the future.

13. RBI Monetary Policy 2019
 Key Indicators
 CRR
 SLR
 Repo Rate
 Reverse repo rate
 Marginal Standing
facility rate
 Bank Rate
 Current Rate
 4%
 19.00%
 5.75%
 5.50%
 6.00%
 6.00%

14. Limitations of Monetary Policy
 Existence of non-monetized sector.
 Excess of non banking financial
institutions
 Existence of unorganized financial
markets.
 Monetary and fiscal Policies lack
Co-ordination.

15. Types of Monetary Policy
 An expansionary monetary policy is
focused on expanding, or increasing, the
money supply in an economy.
 A contractionary monetary policy is
focused on decreasing the money supply
in the economy. The central bank uses
its monetary policy tools to increase or
decrease the money supply.

16. Use of Expansionary Policy
 To increase the money supply.
 To tackle unemployment.
 To improve people’s purchasing power.
 When economy is in recession and
depression.
 To increase economic growth.

17. Use of Contractionary policy
 To reduce money supply.
 To control inflation.
 To decrease economic growth.
 To Raise Taxes
 To economy is in boom period.

18. What economic variables can
monetary policy control?
 It can control inflation.
 Does not have a systematic and sustained
effect on macroeconomic variables other
than the inflation rate.
 Short run effect on output and
employment.
 Short run impact on consumption and
investments.

19. Monetary Policy to Control Inflation
1. Central bank sells securities through OMO
2. Increases Bank Rate
3. Raises CRR
Money supply decreases
Interest Rate Rises
Investment Declines
Aggregates Demand Declines
Price level Falls

20. Tools of Monetary Policy
 Open Market Operation: they are primary
determinants of changes in interest rates and
the monetary base.
 Types of OMO
 Dynamic OMOs: intended to change the level of
reserves and the MB.
 Defensive OMOs: intended to offset movements
in other factors that affect reserves and the
monetary base.

21. Discount Policy
 Primarily involves changes in the discount
rate.
 It affects the money supply by affecting the
volume of discount loans.
 The discount loans are of three types:
 Primary Credit
 Secondary Credit
 Seasonal Credit

22. Reserve Requirements
 They affect money supply by affecting reserves
and the money multiplier
 A rise in reserve requirements:
1. Reduces excess reserves.
2. Increases the demand for reserves.
3. Increases the interbank rate
4. Reduces the money supply.

23. THANK YOU