RBI Monetary Policy

Regulation of supply of money and cost and availability of credit in the economy PURPOSE of Monetary Policy Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth

Controlling Liquidity
RBI controls the supply side of the Funds and by changes in CRR and SLR, Bank control the supply side of the money. when RBI increase these ratio then available funds with the banks will go down and as demand remain the same then people will have to pay more asinterestandinterestrate will go up. On the reverse if RBI reduce these rates ,then amount available with bank for lending will be increased and they have to reduce rates to lend more.

Impact on Inflation
RBI manipulates these ratios then money supply in market increases/increases accordingly. The Increase in CRR will squeeze money from market ,so less money will chase few things means less demand so it will reduce Inflation. some times in few cases Inflation is due to supply side ,like in case of pulses and sugar the demand is some what the same but production has been reduced and rate has been doubled .In these types of cases Ever Increase in CRR will not have much impact as the problem is from supply side

RBI Monetary policy

Limitations of Monetary Policy

Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation Monetary policy is restricted by the impact of other government actions,especially Fiscal policy,ile, decisions about government expenditures and taxation Problems of an inflexiblr labour market,inadequate infrastructure and,most important,fiscal policy whose discipline is open to question limits the effectiveness of th montary policy.