Monetary Policy Definition Fiscal Policy Definition Difference between them Inflation Bank reserve ratio Open market operation Repo & Reserve repo rates Cash reserve ratio Statutory liquid ratio Factors affecting Impact Limitation

1. • Presented By:
• Rashmi Vaishya 14
• Sunil Shinde 15

2. MONETARY POLICY
Regulation of supply of Money and Cost and Availability of Credit in the
economy
Purpose of Monetary Policy
Maintain price stability, 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

3. FISCAL POLICY
Use of “Government Expenditure”, and “taxation” to manage the economy.
Purpose of Fiscal Policy
Stabilise economic growth, avoiding the boom and bust economic cycle
Variables affected by Fiscal Policy in the economy
Aggregate demand and the level of economic activity
The pattern of resource allocation
The distribution of income.

4. IMPORTANCE OF MONETARY
POLICY
Gross National Product (GNP) = C + I + G + X
Where: C = Private Consumption expenditure
I = Private Investment Expenditure
G = Government Expenditure
X = Net Exports
C, I, X can be influenced by the monetary policy which
can also influence the private consumption and
investment spending and exports and imports.

5. What are the objectives of the Monetary
Policy?
• Maximum feasible output.
• High rate of growth.
• Fuller employment.
• Price stability.
• Greater equality in the distribution of income and
wealth.
• Healthy balance in balance of payments(BOP)
• ensure adequate flow of credit to the productive
sectors of the economy.

6. How is the Monetary Policy different
from the Fiscal Policy?
MONETARY POLICY FISCAL POLICY
•regulates the supply of
money
•regulates the cost and
availability of credit in the
economy
•deals with both the
lending and borrowing
rates of interest for
commercial banks
•aims to maintain price
stability, full employment
and economic growth.
•defined as a deliberate
change in government
revenue and expenditure
to influence the level of
national output and prices
•broader tool with the
government
•used to overcome
recession and control
inflation

7. MONETARY POLICY – RBI’s ROLE
Demand for Money Demand for goods/services
Ensuring price
stability and ensuring
savings
Control on bank
credit when prices
rise/fall
Instruments such as CRR,
OMO & Bank Rate
Control on money
supply, velocity of
circulation of money
during inflation

8. TYPES OF MONETARY POLICY
Quantitative measures Qualitative Measures
• Bank rate
• Open market
operations
• Cash reserve ratio
(CRR)
• Statutory liquidity
ratio (SLR)
• Rationing of credit
• Moral Suasion
• Direct Action
• Regulation in
consumer credit
• Marginal standing
facility(MSF)

9. How does monetary policy affect
inflation and other problems???

10. Inflation Movement
Uncontrolled Inflation despite
Further CRR hikes
CRR hikes proved to
Be effective
To curb Inflation
Inflation Down on account
of global credit crunch
http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/

11. BANK RATE POLICY
• Bank rate is the
minimum rate at which
the central bank
provides loans to the
commercial banks. It is
also called the discount
rate.
• The bank rate has been
increased from
12.00% in 1991 8.75% in
2013 9.00% in 2014
Dear money
policy
Bank rate
interest rate
borrowing will be
less profitable
results contraction of
credit
Near money
policy
Bank rate
interest rate
borrowing will be
more profitable
results expansion of
credit

12. OPEN MARKET OPERATIONS
• An open market operation is
an instrument of monetary policy which involves
buying or selling of government securities from or to
the public and banks.
• This mechanism influences the reserve position of the
banks, yield on government securities and cost of bank
credit
• When RBI offers securities for sale, it intends to
contract money supply and credit.
• When the RBI is pursuing the expansionary monetary
policy will buy securities in the market, so that supply
and credit capacity will be increased.

13. OMO’s TOOL
REPO RATE REVERSE REPO RATE
Repo rate is the rate at
which RBI lends to
commercial banks
generally against
government securities
Reverse Repo rate is
the rate at which RBI
borrows money from
the commercial banks
tightening of the policy
The repo rate is 8.00 % The reverse repo rate is
7.00%.
12
10
8
6
4
2
0
Reverse Repo rate

14. Repo and Reverse Repo rates Movement
Repo rate reduction due to make
credit available at cheaper rates
Increased rates to control the liquidity

15. CASH RESERVE RATIO
• CRR, or cash reserve ratio, refers to a portion of deposits (as
cash) which banks have to keep/maintain with the RBI.
• During Inflation RBI increases the CRR due to which
commercial banks have to keep a greater portion of their
deposits with the RBI .
• Higher the CRR with the RBI lower will be the liquidity in
the system and vice-versa.
• This serves two purposes.
– ensures that a portion of bank deposits is totally risk-free
and
– enables that RBI control liquidity in the system, and
thereby, inflation
• As of today, the CRR is 4%

16. Change in CRR… why?
In the third quarter review of January 2012 CRR was
reduced, to mitigate tight liquidity conditions, by 50 basis
points leading to increase in liquidity by Rs.480 billion into
the banking system.
It has been decided to reduce
the minimum daily
maintenance of CRR from
99 %  95 % effective from
the fortnight beginning
September 21, 2013, while
keeping the CRR unchanged at
4.0 %
This reduction (in CRR from 5.5
per cent to 4.75 per cent)
injected around Rs 48,000crore
of primary liquidity into the
banking system.
(Rs 16000crores for every 25
basis points cut in CRR)

17. CRR Movement
Before 1991
•Government raised funds below
market rate
•No depth in Government Securities
Market
•Regulation of deposit rates
•Under developed financial markets,
Less financial instruments availability
Result
•Complex, distorted interest rate
structure
•Adversely affected viability and
profitability of banks
•Transparency and norms could not be
followed strictly

18. Boost Economy after
2001 Slowdown /
dotcom bubble
Stable CRR from
2004 to 2006
Rise in CRR to control liquidity,
due to Heavy Capital Inflow &
to curb Re Appreciation
CRR hikes to
curb inflation
CRR Cuts to boost
economy after
Sub prime loss /
Global meltdown
CRR Movement

19. STATUTORY LIQUID RATIO
• Every financial institution has to maintain/invest a
certain quantity of liquid assets with themselves at
any point of time of their total time and demand
liabilities before providing credits to its customer.
• These assets can be cash, precious metals, approved
securities like bonds etc. The current SLR is 23%.

20. Stable SLR from
1998 onwards
SLR Movement
Banks to made available more funds
& More Efficiency

21. MARGIN STANDING FACILITY
• MSF scheme is that in MSF banks can use the
securities under SLR to get loans from RBI
• During Inflation RBI fixes a high rate of margin
on the securities kept by the public for loans
• If the margin increases  the commercial banks
will give less amount of credit on the securities
kept by the public thereby controlling inflation
• MSF rate is 1% more than repo rate.

22. DEFICIT FINANCING
• It means printing of new currency notes by RBI
• If more new notes are printed it will increase
the supply of money thereby increasing
demand and prices
• Thus during Inflation, RBI will
– stop printing new currency notes thereby
controlling inflation.
– issue new currency notes replacing many old notes
• This will reduce the supply of money in the
economy

23. LIQUIDITY ADJUSTMENT FACILITY
• LAF consists of daily infusion or absorption
of liquidity on a repurchase basis, through repo
(liquidity injection) and reverse repo (liquidity
absorption)auction operations, using
government securities as collateral
• The increase in the policy repo rate under the
liquidity adjustment facility (LAF) by 25 basis
points from 7.25 %  7.5 %

24. EXCHANGE RATE MOVEMENT
LAF - To Control Exchange Ratio
– Outflow of $ from India Market
Sterilization to
Control rupee
Appreciation

25. FOREX RESERVES POSITION
The Surge in Foreign Exchange Reserves
Sterilization / Selling bonds
& Buying dollars

26. MONETARY POLICY – TERMINOLOGY
• Inflation refers Inflation to a persistent rise in prices
Money Supply • Total volume of money circulating in the economy
• Minimum rate at which the central bank provides loans to commercial
banks Bank Rate
•Amount of money that banks must set aside with RBI against their
deposits Cash Reserve Ratio (CRR)
• Percentage of bank funds to be maintained in government and
approved securities Statutory Liquidity Ratio (SLR)
Repo Rate • Rate at which RBI lends to other banks against government securities
Reverse Repo Rate • Rate at which RBI borrows from other banks
Capital Adequacy Ratio (CAR) • Capacity of bank meeting the time liabilities and other risk
Open Market Operations (OMO) • Purchase and sale of securities in the open market

28. Monetary Policy – Influence
Target Variables
-Inflation
-Interest rate
-Real GDP
-Employment
-Consumption
-Savings
-Investment
Policy Variables
- Money supply
- OMO: Liquidity conditions
- policy rates (CRR, repo etc.)

29. FACTORS AFFECTING MONETARY POLICY
 There exist a non-monetized sector
 Excess of non-banking financial
institutions (NBFI)
 Existence of unorganized financial
market
Money not appearing in an economy
 Time lag affects success of monetary
policy
Monetary policy and fiscal policy lacks coordination

30. IMPACT ON INDIA
Money and credit market
Local
Institutions
Domestic
Banks
Domestic MFs NBFC
Re $
Financial Channel

31. 31
CHALLENGES FOR RBI
Growth amid
Global economic slowdown

32. 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
32
Monetary Policy cannot work in isolation!!

33. THANK
YOU..!
CRR/SLR