MONETRY POLICY AND MARKET

MONETARY POLICY AND MARKET

FINAL DRAFT SUBMITTED IN PARTIAL FULFILLMENT OF COURSE TITLED
Economics I FOR COMPLETION OF B.A.LL.B. (HONS.) IN
The ACADEMIC YEAR 2019-20

Submitted to - Submitted by –
Dr. Shivani Mohan, Huma Siddiqua
Faculty of Economics I Roll no. - 1927
3rd semester, B.A.LLB. (Hons.)

August 2019

Chanakya National Law University

Nyaya Nagar, Mithapur, Patna (Bihar)

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ACKNOWLEDGEMENT

I would like to thank my faculty, Dr Shivani Mohan, whose assignment of such a relevant subject
made me work to learn about the subject with greater interest and enthusiasm and also guided me
during the project. I owe the current realization of my project to my friends, who helped me
immensely with the sources of research material during the project and without which I could not
have completed it in a current way. I would also like to extend my gratitude to my parents and to
all those invisible hands that helped me at every stage of my project.

THANK YOU!
NAME-HUMA SIDDIQUA
ROLL NO- 1927
3rd Semester
B.A.LL.B. (Hons.)

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DECLARATION

I hereby declare that the work reported in the B.A.LL. B (Hons.) Project Report entitled
“MONETARY POLICY AND MARKET” submitted at CHANAKYA NATIONAL LAW
UNIVERSITY, PATNA is an authentic record of my work carried under the supervision of Dr
Shivani Mohan. I have not submitted this work elsewhere for any other degree or diploma. I am
fully responsible for the contents of my project report.

HUMA SIDDIQUA

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TABLE OF CONTENT

CHAPTER 1- INTRODUCTION...........................................................................5

AIMS AND OBJECTIVES .....................................................................................6

HYPOTHESIS..........................................................................................................6

RESEARCH METHODOLOGY ...........................................................................6

LIMITATION:..........................................................................................................6

CHAPTER 2- INTRODUCTION TO RBI'S MONETARY POLICY ...............7

CHAPTER 3- MONETARY POLICY IN DIFFERENT YEARS .......................9

CHAPTER 4- HISTORY OF MONETARY POLICY ......................................10

CHAPTER 5- MONETARY POLICY AND ITS IMPACT ON ECONOMY.. 11

CHAPTER 6- CONCLUSION..............................................................................12

BIBLIOGRAPHY ..................................................................................................13

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CHAPTER 1- INTRODUCTION

Monetary policy is a policy adopted by the monetary authority of a country that controls the interest
rate payable on very short-term loans, the money supply, often indicating inflation or the interest
rate to guarantee price stability and general confidence in the currency It can also be seen that
monetary policy tends to contribute to the stability of the gross domestic product, reach and
maintain low unemployment and maintain exchange rates predictable with another currency. The
monetary economy provides us and helps us understand how to develop an optimal monetary
policy.
In developed countries, monetary policies have generally been formed separately from fiscal
policy, which refers to taxes, public spending and associated loans, while monetary policy is
known as expansive or contractual in general. The expansive policy occurs when a monetary
authority comes to stimulate the economy. An expansive policy keeps short-term interest rates at
a lower than usual rate or increases the total money supply in the economy faster than normal. It
is traditionally used to try to fight unemployment in a recession by reducing interest rates in the
hope that less expensive credit will attract companies to expand.

This increases aggregate demand (the general demand for all goods and services in an economy),
which increases short-term growth measured by gross domestic product (GDP) growth. The
expansive monetary policy generally reduces the value of the currency relative to another currency
(the exchange rate). The opposite of the expansive monetary policy is the contractual monetary
policy, which keeps short-term interest rates higher than usual or which slows down the rate of
growth of the money supply or even reduces it. This slows down economic growth in the short
term and also reduces inflation.
The contractual monetary policy can lead to an increase in unemployment and a decrease in loans
and the costs of consumers and businesses, which can eventually lead to an economic recession if
implemented too strongly.

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AIMS AND OBJECTIVES

The researcher tends to emphasize the study of –

• To find out the meaning of the monetary policy.
• To understand and analyse the present situation of monetary policy.
• To understand the challenges and guidelines of monetary policy.

HYPOTHESIS

The researcher has formulated the hypothesis, the validity of which will be checked in the course
of the making of the project that:
1. Monetary policy affects inflation
2. Challenges of monetary policy.

RESEARCH METHODOLOGY

The researcher will make use of doctrinal research in order to collect qualitative and quantitative
data to complete the project. The doctrinal research includes the use of literary sources.
The methods of data collection will include:
Primary sources – Data would be collected through the case study, law commission reports,
constitutional provisions, statutory provisions.
Secondary sources – Data will be collected through library study and Internet search (books,
journals articles, etc.).

LIMITATION:

The presented research is confined to a time limit of one month and this research contains doctrinal
works, which are limited to library and internet sources and empirical research.

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CHAPTER 2- INTRODUCTION TO RBI'S MONETARY POLICY

The Indian Reserve Bank is the Central Bank of India Institute and the control of the Rupee's
monetary policy, as are the million-dollar division reserves. The RBI is the world's leading
monetary authority, for example, the central actuary bank as the bank of national and state
government. The goals of the child will maintain the stability and guarantee of a privileged
agreement on the sector of the productive product.

A reduction in interest rates will affect different types of debt funds differently depending upon
their portfolio. Not all debt funds react similarly to a fall in market yields. The RBI rate cut is
expected to bring down EMIs on home and auto loans, and reduce the debt repayment burden on
corporates. In all, the central bank has reduced the benchmark lending rate by 0.75 percentage
point since February this year.1

• RBI MPC projects an upward bias in food inflation in the short term due to rising food prices

• To promote digital transactions, RBI has decided to resign from the RTGS and NEFT positions

• In the crisis of NBFC, Shaktikanta Das says that action will be taken whenever necessary

. • RBI Governor Shaktikanta Das said a committee will be formed to investigate the charges of
ATMs.

• Rupa Rege Nitsure, chief economist at L&T Financial Holdings, He said: "Today's political
actions are perfect and give a clear signal that the RBI will continue with easy monetary conditions
until it sees a definitive improvement in the combination of growth and inflation."

The RBI is also a tool the government Banker and performs merchant banking function for the
central and the state government. RBI lends to the commercial banks through its discount window

1
The Economics of Central Banking, Livio Stracca, pg. 25

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to help the Banks meet depositor's demands and reserve requirement. The interest rate the charges
the other Bank for the purpose is called Bank rate.

Key Indicators
Indicator Current rate
CRR 4%
SLR 18.75%
Repo rate 5.40%
Reverse repo rate 5.15%
Marginal Standing facility rate 5.65%
Bank Rate 5.65%

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CHAPTER 3- MONETARY POLICY IN DIFFERENT YEARS

The level of foreign exchange reserves increased to $ 372 billion at September 30, 2016, a record
level. The Committee expects that the strong improvement in plantations, together with supply
management measures, will improve the outlook for food inflation. Statement of monetary policy
for 2017-18: 3.19 pm: VAB growth of 7-7.8% is expected for the third and fourth quarters, says
RBI. 15.15: India's 10-year benchmark bond performance fell 2 basis points to 7.05 per cent from
around 7.07 per cent before the political decision.

The six-member monetary policy committee (MPC) led by Urjit Patel of the Reserve Bank of
India in its first three-day three-day meeting increased the key repurchase rate by 25 basis points
for the first time since January 2014, by about four and a half years, at 6.25%. "The decision of
the MPC is consistent with the" neutral "position of monetary policy in line with the goal of
achieving the medium-term consumer price index (CPI) inflation target of 4% in a range of + / -
2% supporting growth ", said RBI in a note. This was the first RBI walk in the four-year era of
Narendra Modi.

The resolution of the bi-monthly monetary policy of April 2019, CPI inflation was projected at
2.4% for the fourth quarter of 2018-19, 2.9-3.0 per cent for H1: 2019-20-20 and 3.5-3, 8 per cent
for H2: 2019-20, with widely balanced risks. ... This gave an upward bias to the short-term
trajectory of food inflation.

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CHAPTER 4- HISTORY OF MONETARY POLICY

The study examines and tells the analysis of monetary policy in India after independence in the
context of the interplay between domestic structure and external factors. Domestic structure
includes economic and political structure, the demands of growth, poverty reduction, financial
inclusion and the gradual development of institutions and markets. It is argued a greater
congruence between ideas and structure in recent times contributed to improvements in institutions
and to India‘s better performance. Policy moved from struggling with scarcity to having to deal
with excess foreign exchange.2

Automatic financing of government deficits gave way to more independence for the Reserve Bank,
but political pressures led to a uniquely Indian balancing between experiences largely from
published materials, including official records. Financial markets were quite active at the time of
independence; interest rates were market-determined; an incipient bill market was also developed.
But according to the ideas of the time planning was extended to the monetary and financial system
also. To support planned development, with the commanding heights for capita intensive public
sector projects, the emphasis was on generating resources for public investment, allocating
resources to priority sectors, and expanding the reach of the formal financial system

2
http://www.yourarticlelibrary.com/policies/monetary-policy-meaning-objectives-and-instruments-of-monetary-
policy/11134

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CHAPTER 5- MONETARY POLICY AND ITS IMPACT ON ECONOMY

As the name suggests, monetary policy deals with the role of money in the economy. In most
modern economies, monetary policy is configured differently. In the United States, the central
bank is known to the Federal Reserve.

Depending on the circumstances, central banks can be used to increase the growth rate or to make
a monetary policy contrary, which aims to limit growth to inflation or increase prices. Central
banks of the United States of America, banks power plants can be used to increase the growth rate,
to counter monetary policy, which aims to limit growth to inflation or to raise prices. Central banks
like the Federal Reserve, often called the Fed, use a variety of tools to shape monetary policy. They
can buy or sell money from the economy. The monetary policy introduces money into the economy
when it seems weak and is reduced when spending seems stronger. Governments can also reduce
taxes when the economy seems weaker to give consumers and businesses more money to spend,

while the recent financial crisis and recession have revised discussions about the role of monetary
policy. Understanding how monetary policy works. For decades, these debates have inspired many
thoughts. There is a broad consensus on the influence of monetary policy, but not all economists
agree that monetary policy influences real economic activities.

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CHAPTER 6- CONCLUSION

Monetary policy is the monetary authority adopted by the policy of a country that controls the
interest rate payable on a very short-term loan or the supply of money that often indicates inflation
or the interest rate to guarantee price stability and confidence general in the currency. The
Monterey policy can be both expansive and contractual. In developed countries, monetary policy
is separate from fiscal policy. The increase in the bank rate is the symbol of the tightening of the
monetary policy promoted. The monetary policy committee must meet at least four times a year.

RBI operates in monetary policy, such as the money supply, the interest rate and the availability
of credits to maintain the price, the stability of the stable exchange rate, the economic growth he
monetary policy of RBI in 2016 was 6.25 %, while in 2017 it was 7-7.8, while in 2018. it was
6.25%, now in the first half of 2019, the target was maximum employment and inflation of 2% and
decided to maintain the target range for the federal funds rate.

It was also concluded that if monetary policy influences inflation as it directly affects the interest
rate, it directly influences stock prices, wealth, exchange rate a Through these channels, monetary
policy influences spending, investments, the production, employment and inflation in the United
States

. Inflation is generally controlled by the central bank or the government, the main policy used is
the monetary policy that establishes the central bank and establishes the interest rate. Therefore, a
higher interest rate reduces demand, leading to lower economic growth and lower inflation. Thus,
the researcher also found that fiscal policy influences monetary policy as fiscal policy influences
aggregate demands through changes in public spending and taxes. These factors influence
employment and family income, thus affecting consumer spending and investment, so monetary
policy influences the money supply in an economy, which affects the interest rate and the inflation
rate.

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BIBLIOGRAPHY

BOOKS AND ARTICLES

1. Roy Harrod, International Economics (4th edition), (1933 - 1958)
2. Monetary policy in India: A modern macro Economics perspective. (1st edition), 2016

3. The economics of central Banking by Livio Stracca.

INTERNET SOURCES
1. https://www.investopedia.com/terms/m/monetarypolicy.asp
(last accessed on 04-09-2019 at 9:23 pm)

2. https://economictimes.indiatimes.com/definition/monetary-policy
(last accessed on 03-09-2019 at 10:11 pm)

3. http://www.yourarticlelibrary.com/policies/monetary-policy-meaning-objectives-and-
instruments-of-monetary-policy/11134
(last accessed on 03-09-2019 at 11:51am)

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