Subject: Business Environment, Macro-Economics
Topic: Monetary Policy of India
Slide 1 – Monetary policy of India presentation
Slide 2 – Introduction
It refers to a set of policies by the monetary authority (Central Bank) which regulate the money supply and credit flows in the economy to achieve certain macroeconomic goals .
In India, RBI plays the role of the central bank and formulates the monetary policies of India.
Slide 3 – Meaning of Monetary policy
It is the process by which the monetary authority of a country, controls the supply of money in the economy by manipulating interest rates in order to maintain price stability and achieve economic growth
Slide 4 – Objectives of Monetary Policy
The main objectives of monetary policy of India are –
Increase in employment
Price stability and inflation control
Exchange rate stability
Balance of payments equilibrium
Reducing income inequality
Slide 5 – Instruments of Monetary policy of India
All instruments of the monetary policy of India can be categorized under two categories –
Quantitative measures– Bank rate,CRR, SLR, Repo rate, Reverse repo rate, Open market operations
Qualitative measures – moral suasion, change in margin requirements, direct controls, credit rationing,
Slide 6 – Bank Rate
Bank rate is the rate at which RBI lends money to the commercial banks.
An increase in bank rate is likely to increase all other interest rates and decrease the total money supply. Therefore it is a contractionary monetary policy.
Decrease in bank rate is likely to decrease all other interest rates and increase the total money supply. Therefore it is an expansionary monetary policy.
Slide 7 – Cash Reserve Ratio
Banks have to keep a certain minimum percentage of their total deposits (demand deposits + time deposits) with the RBI, that minimum percentage is called CRR.
An increase in CRR will result in less liquid cash deposits with the banks and is a contractionary monetary policy.
A decrease in CRR will result in more liquid cash available with the banks and it is an expansionary monetary policy.
Slide 8 – Statutory Liquidity ratio
SLR stands for Statutory liquidity ratio.
Banks are supposed to maintain a minimum percentage of their total deposits as a sum of excess reserve (ER), cash balance with other banks (CB) and government securities(GS). That percentage is called SLR.
SLR = (ER+CB+GS)/(Total deposits)
Increase in SLR is contractionary policy and decreases in SLR is expansionary policy.
Slide 9 – Repo rate
Repo means repurchase operations.
It is the rate at which the RBI lends money to banks against government securities.
When the repo rate increases it becomes expensive for banks to borrow money from RBI and the money supply decreases, therefore it acts as a contractionary monetary policy. The decrease in repo rate will increase the money supply and it is a type of expansionary monetary policy.
Slide 10 – Reverse repo rate
The rate which other banks receive when they deposit their extra cash with RBI along with the repurchase agreement of government securities in future is called reverse repo rate.
An increase in reverse repo rate results in decrease of money supply and is a contractionary measure.
A decrease in reverse repo rate increases the money supply and it is expansionary measure.
Slide 11 – Open Market Operations
Buying and selling of government securities by the RBI in the open market is called open market operations.
When RBI buys government securities the money supply increases
When RBI sells government securities the money supply decreases
Slide 12 – Qualitative measures of Monetary policy in India
It is also called the selective credit controls since these policies affect only certain aspects.
Credit rationing refers to the control of government over the amount of credit available for certain industrial sectors. Such control is exercised to ensure that all sectors get adequate amount of credit.
Change in margin requirements affects the minimum amount of money that an individual is required to use from his own resources when he borrows money from the bank.
Slide 13 – Qualitative measures of Monetary policy
Moral suasion is the method by which RBI persuades and convinces the banks to undertake certain actions which are in the economic interests of the country.
When all methods prove ineffective, RBI may take direct actions by laying down specific rules and regulations under which banks operate.