Monetary policy of India

1. Monetary policy of India Presented by Daud Rizwan 16-mba-w-17 1

2. Content Introduction Objectives Types of monetary policy Tools of monetary policy Current Monetary policy in case of India Conclusion 2

3. Introduction Monetary policy   is the process by which monetary authority of a country, generally central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth . RBI is the central bank of India 3

4. Objectives : In India, the central monetary authority is the  Reserve Bank of India  (RBI ). Monetary policy is designed to maintain the following objectives: Full Employment Price Stability Economic Growth Balance of Payments 4

5. Full Employment -: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but also because of the loss of social standing and self-respect . Price Stability -: One of the objectives of monetary policy is to stabilise the price level. Both economists and laymen favour this policy because fluctuations in prices bring uncertainty and instability to the economy. 5

6. Economic Growth -: One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time.” Balance of Payments -: Another objective of monetary policy since 1950s has been to maintain equilibrium in the balance of payments . BOP is the record of all transactions between resident of the country and rest of the world during a particular period . 6

7. Types of monetary policy There are two types of monetary policies : Expansionary monetary policy Contractionary monetary policy 7

8. Expansionary monetary policy   Expansionary  monetary policy  is when a  central bank  uses its tools to expand the economy by   increasing the  money supply and lowering   interest rates which increases   aggregate demand . That boosts  economic growth as measured by Gross Domestic Product ( GDP ). It is used during recession. Recession is a temporary period of economic decline during which trade and industrial activity are reduced. 8

9. Contractionary monetary policy Contractionary  monetary policy are set of tools that slow down the growth rate of the economy to prevent it from overheating , these tools includes the credit flow in the economy, interest rate and currency exchange. Here monetary policy are being used during Inflation. Inflation is continuous increase in the price level of goods and services. A nd increase in supply of money as compared to some benchmark . 9

10. Tools of monetary policy Cash Reserve Ratio (CRR ) -: Cash Reserve Ratio is a certain percentage of  bank deposits  which banks are required to keep with RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the  liquidity  in the system and vice versa.  Statutory Liquidity Ratio (SLR)-: It is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers. 10

11. Repo Rate -: Repo rate is the rate at which RBI lends to its clients generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Reverse Repo Rate -: Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit . 11

12. Bank Rate -: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes. Open Market Operations (OMOs ) -: These include both outright purchase/sale of government securities for injection/absorption of durable liquidity, respectively. 12

13. Marginal Standing Facility (MSF) -: A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their  Statutory Liquidity Ratio (SLR)  portfolio up to a limit (currently two per cent of their net demand and time liabilities deposits) at a penal rate of interest. 13

14. Current monetary policy of India On October 4 during the first monetary policy committee meet Urjit Patel as a governor of RBI has announced some of the major decisions taken for the change in some instruments of monetary policy which involves the Policy Repo rate , Reverse repo rate under liquidity adjustment facility (LAF) Marginal standing facility (MSF) rate and the B ank rate   14

15. Following are data of current changes made in the Fourth-Bi meeting for the monetary policy of india In his first monetary policy review as a governor of RBI, Urjit Patel has announced the decision to cut the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent. The reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.75 per cent .   15

16. Following are the current data of the present monetary policy instruments used by the Reserve Bank of India 16 Policy Repo Rate : 6.25% Reverse Repo Rate : 5.75% Marginal Standing Facility Rate : 6.75% CRR : 4% SLR : 20.75 % Bank Rate : 6.75%

17. Conclusion The monetary policy deals with the function of money supply in the market keeping this in mind that it should not cause the situation of inflation and recession . The Reserve bank of India is the central authority of the monetary policy In India which use different instruments to control the inflow and outflow of the money in the economy . Monetary policy is very important for the economic growth of a country , its instruments play a very important role to adjust the economic condition according to the current economic situation 17

18. Thank you…. 18