Monetary policy

Neha Yadav (Asst. Professor) 1

“MONETARY POLICY”

MS.NEHA YADAVAsst. ProfessorGDRCST, Bhilai

Business Environment


Introduction Meaning Definition Objectives Instruments of monetary policyi. Quantitative instrumentsii. Qualitative instruments

CONTENTS


Monetary policy plays a significant role in the economic development of a nation. Under monetary policy, different measures are undertaken by the Central Bank (Reserve Bank of India) in order to control and regulate the volume of currency and credit in a nation.

INTRODUCTION


Monetary policy is a policy which influences the public’s stock of money substitutes of the public’s demand for such assets, or both-that is, policy which influences the public’s liquidity positions.

MEANING


According to Harry G. Johnson, Monetary policy is a “policy employing the central bank’s control of the supply as an instrument for achieving the objectives of the general economic policy.”

DEFINITION


The objectives of monetary policy is developed and developing economy are slightly different. The main objectives of monetary policy are discussed as under: Price Stability Monetary Equilibrium Full Employment High Rate of Growth Reducing Inequalities of Income Capital Formation

OBJECTIVES


The instruments of monetary policy are broadly classified into two categories: Quantitative Instruments Qualitative Instruments

INSTRUMENTS OF MONETARY POLICY


Bank Rate: The bank rate is the minimum rate in which the central bank of a country is prepared to give credit to the commercial bank. When central bank wishes to control the credit and inflation it raises the bank rate. Increased bank rate increases the cost of borrowing of the commercial bank who in turn charges a higher rate of interest from their borrowers. As a result, the demand for the credit will go down. Central bank adopts dear money policy when the supply of credit needs to be reduced during period of inflation. It adopts cheap money policy when credit needs to be expanded during deflation.

QUANTITATIVE INSTRUMENTS/MEASURES


Open Market Operation: Open market operation refers to the sale and purchase of securities in the open market by the central bank. By selling securities central bank withdraws cash balances from the country. On the other hand, by buying the securities central bank contributes to cash balance in the economy. Through open market operation, if cash balance are increased, the flow of credit will increase and if cash balance is reduced, the flow of credit will decrease.


Cash Reserve Ratio: It refers to that portion of the total deposit which a commercial bank has to keep with the central bank in the form of cash reserve. When cash flow or credit is to be increased, minimum reserve ratio is reduced and when cash flow or credit is to be reduced, minimum cash reserve ratio is increased. Statutory Liquidity Ratio: It refers to that portion of the total deposit which a commercial bank has to keep with itself in the form of liquid assets. To reduce the flow of credit in the market, central bank increases this liquidity ratio. In case of expansion of credit, liquidity ratio is reduced.


Margin Requirements: It refers to the difference between the current value of the security offered for loan and the value of loan granted.Rationing of Credit: It refers to fixation of credit quotas for different business activities. Central bank fixes the quota for different business activities. The commercial bank can not exceeds the limit while granting loans. It is used generally to check for speculative activities.

QUALITATIVE INSTRUMENTS


Direct Action: If members banks do not comply with the directives, direction action is taken. Derecognition of commercial bank as a member of the country’s banking system.Moral Suasion: Central bank makes members banks agree pressure to follow its directives with a view to control the flow of credit. Central bank is the controller of all the commercial bank. Therefore, these bank follow the advice in relation the flow of credit.


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Monetary policy