1. Broader role for Monetary Policy
Gg
Sudarshan Kumar Patel
Chandan Kumar Ravi

2. EDITORIAL-THE HINDU BUSINESS LINE
Date- Friday ,February 3, 2012
Author-
K. Kanagasabapathy
Director EPW Research Foundation

3. About………….
Monetary Policy
Unsustainable sovereign debt
Euro crisis
2008-09 crisis
Governor – D Subbarao
Different Instrument
a. Quantitative
b. Qualitative
Financial stability
Public Debt Suistanability

4. Introduction
CD Deshmukh
The First Indian Governor of
Reserve Bank of India (RBI
Raghu ram Rajan,Present
Governor

5. Unsustainable Sovereign Debt
Bonds issued by a national government in a foreign currency, in
order to finance the issuing country's growth. Sovereign debt is
generally a riskier investment when it comes from a developing
country, and a safer investment when it comes from a developed
country. The stability of the issuing government is an important
factor to consider, when assessing the risk of investing in sovereign
debt, and sovereign credit ratings help investors weigh this risk.

6. Monetary policy- Meaning
The part of the economic policy which regulates the level of money
in the economy in order to achieve certain objectives.
In INDIA,RBI controls the monetary policy. It is announced twice
a year, through which RBI,regulate the price stability for the
economy.

7. Cont……………….
Monetary Policy is the process by
which the monetary authority of a
country controls the supply of money,
often targeting the interest rate for the
purpose of promoting economic growth
and stability .
According to Harry G.
Johnson
“Monetary policy employing the
central bank’s control of supply of
money as an instrument for
achieving the objectives of general
economic policy.”


8. Nature of Monetary Policy
• Monetary policy uses a variety of tools (interest rate) to control
influence outcome like(economic growth , inflation, exchange
rate with other currencies and unemployment).
• It controls the supply of money
• Monetary policy works through expansion or contraction of
investment and consumption expenditure.

9. Objectives of Monetary Policy
There are basically three major
objectives of
monetary Policy. Which are: To ensure price stability.
 To encourage economic growth.
 To ensure stability of exchange rate
of money.

10. Inflation
Inflation is a rise in the general level of prices of
goods and services in an economy over a period
of time. When the price level rises, each unit of
currency buys fewer goods and services. A chief
measure of price inflation is the inflation
rate.When Prices rise the Value of Money falls.

11. STAGES OF INFLATION
• 1. CREEPING INFLATION
(0%-3%)
• 2. WALKING INFLATION
( 3% - 7%)
• 3. RUNNING INFLATION
• 4. HYPER INFLATION
(10% - 20 %)
( 20% and abv)

12. 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

13. INSTRUMENTS OF MONETARY POLICY
• 1. Bank Rate of Interest
• 2. Cash Reserve Ratio
• 3. Statutory Liquidity Ratio
• 4. Open market Operations
• 5. Margin Requirements
• 6. Deficit Financing
• 7. Issue of New Currency
• 8. Credit Control

14. Bank Rate of Interest
It is the interest rate which is fixed by the RBI to control the lending
capacity of Commercial banks . During Inflation , RBI increases the
bank rate of interest due to which borrowing power of commercial
banks reduces which thereby reduces the supply of money or credit
in the economy .When Money supply Reduces it reduces the
purchasing power and thereby curtailing Consumption and lowering
Prices.

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 . This serves
two purposes. It ensures that a portion of bank deposits is totally
risk-free and secondly it enables that RBI control liquidity in the
system, and thereby, inflation.

16. Statutory Liquidity Ratio
Banks are required to invest a portion of their deposits in
government securities as a part of their statutory liquidity ratio
(SLR) requirements . If SLR increases the lending capacity of
commercial banks decreases thereby regulating the supply of
money in the economy.

17. Open market Operations
It refers to the buying and selling of Govt. securities in the open
market . During inflation RBI sells securities in the open market
which leads to transfer of money to RBI.Thus money supply is
controlled in the economy

18. MONETARY POLICY :KEYNESIAN VIEW
EXPANSIONARY MONETARY
POLICY
Problem : Inflation
Measures :
Measures :
1.
2.
3.
TIGHT MONETARY POLICY
1.
Central bank buys securities through open
market operation
It reduces CRR
It lowers bank rate
2.
3.
Central bank sells securities through
open market operation
It raises CRR & SLR bank rate
It raises maximum margin against
holding of stocks of goods
Money supply increase
Interest rate falls
•
Money supply decrease
Investment increase
•
Interest rate decrease
Aggregate demand increase
•
Investment expenditure declines
•
Aggregate demand declines
Aggregate output increase
•
price level falls