MONETARY POLICY

Designed, formulated, implemented by RBI

RBI – Commercial bank – Customers

The objectives of monetary policy :

1. Price stability : It implies control over inflation which is kept under check by the
monetary policy .
Bank rate – Price lending ↑→ rate of interest ↑→ investment ↓→
→Aggregate demand ↓→ price ↓
2. Economic Growth – The main objective of monetary policy is to make available the
necessary supply of money for the economic growth of money.
3. To control business Cycle – Business cycles are boom and depression. In the period
of bom credit is contracted and in period of depression credit is.
4. To promote exports and substitution imports – This is done by providing
-------------- loan to exports and import substitution units which leads to improvement in
balance of payments.
5. To manage aggregate demand : The monetary policy trice to keep the aggregate
demand in balance with the aggregate supply of goods and services. If aggregate
demand is to be increased.
6. To promote sectoral development of fluids – Monetary policy aims at providing
more funds to the priority sector by lowering the interest rates.
7. To promote employment by providing concenional loans to productive sector, small
medium entrepreneur, employment can be generated.

The main aim of the monetary policy is to control the money supply in such a manner, to
expand to it to meet the needs of the economic growth and at the same time contract it to curb
inflation.
 Instrument of Control

Quantitative methods Qualitative methods

(General methods) (Selective methods)
(1) Bank Rate (1) Change in Margin requirement
(2) Open market operation
(3) CRR
(4) SLR
1. Bank rate is the rate at which RB1 lends money to the commercial banks. If bank rate
is increased then commercial banks also charge high rate of interest on loans given to
public. Higher interest rate will contract the credit in the economy i.e. public will take less
loans because rate of interest in high.
2. Open market operation – It is the rate or purchase of govt. securities in the open
market. When the securities are purchased by the central bank then money supply.
3. CRR – Cash ---- ratio.
4. Stationary liquidity ratio – It means certain percentage of deposit is to be kept in
bank in form of liquid deposit. If SLR is more, bank will have less surplus funds for ------
loans, if will grant credit, will vice-versa.
Qualitative Methods
1. Change in margin requirement or loan : Margin is the difference between loan
value and the market value of security. Margin requirement is different for ------- loans.
2. Rationing of credit – The reserve bank fixes a credit quota for the banks, this quota
system was introduced in 1960, if the member bank seeks and more loan than there fixed
quota, they will have to pay higher rate of interest than the prevailing bank rate.
3. CAS – Credit Authorization Scheme : This scheme was introduced in 1965. The
banks were required to attain authorization of the reserve bank before sanctioning any
fresh limit of Rs. 1 crore or more to any single party. In 1986 the limit was raised to Rs. 6
crore.
4. Moral presuation or Moral -------- : Periodically letters are -------------- by the RBI to
the member banks ----- them to exercise control over the credit policy, regular discussion
are held between the RBI and commercial banks.
5. Direct Action – RBI can stop any commercial bank from any type of transaction. In
case of defiance of the orders of the RBI, it can resort to direct action against the member
bank. It can stop giving loan and can even recommercial the closure of the bank.
6. Deferential Interest Rates – The central bank may, prescribe different rates of
interest for different sectors. For eg. it charges lower rate of interest on agriculture, small
scale industries and exports.