CURRENT MONETARY POLICY

Prepared By: Dr. Himani Singh (IB/27)

Prashant Rampuria (IB/29)
Sonal (IB/30)
Vidisha Singh (IB/31)
Babita (IB/32)
Indu Madan (IB/34)
 WHAT IS MONETARY POLICY?

The process by which the central bank or monetary

authority of a country controls

(i) the supply of money,

(ii) availability of money, and

(iii) cost of money or rate of interest,

 TYPES OF MONETARY POLICY
• Expansionary policy:
– Increases the total supply of money in the economy
– Involves decreasing the interest rates to pump liquidity
in the market.
– Government is using since October, 2008
• Contractionary policy:
– Decreases the total money supply.
– Involves raising interest rates in order to combat
inflation.
– Government may use in near future.
INFLATION…..
• Inflation moved up to 1.51% for the week
ended October 17, 2009 compared with 0.83%
for the week ended September 19, 2009.

• The RBI has revised its inflation estimate

upward to 6.50% at the end of March 2010
from earlier estimate of 5% in the second
quarter policy review.
 INSTRUMENTS OF MONEATRY POLICY

OPEN Bank
MARKET
OPERATIONS Rate

NET PURCHASE CHANGES IN

OF FOREIGN REPO RATE AND
CURRENCY REVERSE REPO
ASSETS RATE

CHANGE IN
CRR & SLR
Facts & Figures
OPEN MARKET OPERATIONS…..

• RBI undertakes to buy and sell Government Securities

from participants in the financial markets.

• The operations could be undertaken on an outright

basis or repurchase agreements.

Objectives…..
 Toabsorb or provide liquidity in the market
To stabilize inflation
To maintain a fixed exchange rate
OPEN MARKET OPERATIONS…..

EXPANSIONARY S
MONETARY POLICY
P E
U L
R
C
L
H S
A
S
E CONTRACTION
MONETARY POLICY
S
CASH RESERVE RATIO…..
The base is the total of the deposits that a
bank has.

The RBI pays the bank interest on the amount

parked with it.

Though given up as an indirect instrument,

the CRR seeks to impact the level of money
supply by affecting the value of the multiplier
and is thus on a par with Open Market
Operations, currently the preferred monetary
tool.
REPURCHASE RATE…..

• Repo rate

• Discounted interest rate at which a central

bank repurchases government securities.

• Induction of some of the Short-term liquidity

in the system.
REPURCHASE RATE…..
REVERSE REPURCHASE RATE…..

• Applicable when a country's reserve borrows

money from banks.
• Safe proposition.
P
U
fund shortage
R money to be
being faced by the P taken out of the
reserve.
O economic system.

S
E
STATUTORY LIQUIDITY RATIO…..

• The amount that the commercial banks require to

maintain in the form of
– Cash
– gold or
– govt. approved securities
before providing credit to the customers.

• Controls the expansion of bank credit.

BANK RATE…..

The Discount Rate

The rate of interest which a central bank charges on

the loans and advances that it extends to commercial
banks and other financial intermediaries

For 1 year or more

FOREIGN CURRENCY ASSET…..

• Foreign exchange reserves less gold holdings

• Special drawing rights and
• India's reserve position in the IMF.
 Monetary Policy in an Open Economy
Impossible trinity:
• Open capital account
• Pegged currency regime
• Independent monetary policy

A country with an open capital account cannot hope

to have an independent monetary policy if it runs a
pegged exchange rate.
Pegging the exchange rate induces a loss of monetary
policy autonomy.
Example:
• Let us say you have inflation and so want a
contractionary monetary policy.
• You raise interest rates.
• Since the capital account is open, capital
flows in from abroad in response to the
higher interest rates.
• This puts a pressure on the rupee to
appreciate.
• The Central Bank buys up the dollars coming in to
prevent rupee appreciation.
• This leads to an expansion in net foreign exchange
assets of the Central Bank and thus of money
supply.
• Classic symptom of impossible trinity difficulties:
raising interest rates but money supply growth is
surging.
• An expansion in money supply will lower interest
rates.
• You cannot raise rates, and keep the exchange rate
pegged at the same time.
Example:
• If the US hikes the Fed rate, and India stays
still, capital will flow out and the currency will
depreciate.
• If the RBI wants to prevent depreciation of the
currency, it will have to sell dollars or raise
rates. Both these are contradicting.
• Currency pegging forces RBI to also raise
rates.
• Thus having a peg means following US
monetary policy.
 Summary
• Monetary policy is supposed to be about pinning
down the short rate so as to achieve an inflation
target, and thus stabilise the macro economy.
• Pegging the exchange rate induces a loss of
monetary policy autonomy.
• India’s monetary regime is largely India’s exchange
rate regime.

The biggest question today: What is the monetary

policy?