Monet

arypol
i
cyi
nst
rument
s
I
ntr
oduct
ion:

Monet
arypoli
cyr
efer
stot
hecredi
tcont
rol
measur
esadopt
edbythecentral
bankofacount
ry.
I
ncaseofIndi
aneconomy
,RBIist
hesol
emonetar
yaut
hori
tywhi
chdecidesthesuppl
yof
moneyi
ntheeconomy

TheChakr av
artycommitt
eehasemphasi
zedthatpr
icest
abi
l
ity
,growt
h,equi
ty,
soci
alj
ust
ice,
promotingandnurtur
ingt
henewmonetaryandfi
nanci
ali
nst
it
uti
onshavebeenimpor
tant
object
ivesofthemonetar
ypoli
cyi
nIndi
a

Thei
nst
rument
sofmonet
arypol
i
cyar
eoft
wot
ypes:

1.Quant
it
ati
ve,
general
ori
ndi
rect(
CRR,
SLR,
OpenMar
ketOper
ati
ons,
BankRat
e,RepoRat
e,
Rever
seRepoRate)

2.Qual
i
tat
ive,
sel
ect
iveordi
rect(
changei
nthemar
ginmoney
,di
rectact
ion,
mor
alsuasi
on)

Thesebothmet hodsaffectthelev
el ofaggr
egat
edemandthroughthesuppl
yofmoney,costof
moneyandav ail
abil
i
tyofcr edi
t.Ofthetwotypesofi
nstr
uments,t
hefir
stcat
egor
yincl
udes
bankratevari
ati
ons,openmar ketoperati
onsandchangi
ngr
eserverequir
ement
s(cashreser
ve
rat
io,
statut
oryreser
veratio).

Pol
icyinst
rumentsaremeantt oregulatetheoveral
llevelofcr
editi
ntheeconomythrough
commer ci
albanks.Theselect
ivecreditcontr
olsaim atcontr
oll
ingspeci
fi
ctypesofcr
edit
.They
i
ncludechangingmarginrequi
rement sandregulati
onofconsumercr edi
t.

Wedi
scusst
hem asunder
;

a.BankRat
ePol
i
cy:

Thebankrateisthemini
mum lendingrateoft
hecentralbankatwhichitrediscountsfi
rstclass
bi
ll
sofexchangeandgov er
nmentsecur i
ti
esheldbythecommer cialbanks.Whent hecentr
al
bankfi
ndsthatinfl
ati
onhasbeenincreasi
ngconti
nuously,i
trai
sesthebankr atesoborrowing
fr
om t
hecent r
albankbecomescost l
yandcommer ci
al banksborr
owl essmoneyf rom i
t(RBI )
.

Thecommer cial
banks,i
nr eaction,
raisetheirl
endi
ngratestothebusinesscommuni t
yand
borr
owerswhof urt
herborr
owl essfrom thecommer ci
albanks.Ther
ei scont
ract
ionofcredi
t
andpri
cesarecheckedfrom risingfurther.Onthecont
rary
,whenpr i
cesaredepressed,t
he
cent
ralbanklowersthebankr ate.

Iti
scheaptoborr
owf rom t
hecent ral
bankont hepartofcommerci
albanks.Thel
att
eral
so
l
owerthei
rlendi
ngrates.Businessmenar eencour
agedtoborrowmore.Inv
estmenti
s
encour
agedandfoll
owedbyr i
seinOut put
,employment,i
ncomeanddemandandt he
downwardmov ementofpricesischecked.
b.OpenMar
ketOper
ati
ons:

Openmar ketoper
ati
onsrefert
osal
eandpurchaseofsecur i
tiesi
nt hemoneymar ketbythe
cent
ralbankofthecountr
y.Whenpri
cesst
artri
singandt hereisneedt ocont
rolt
hem, t
he
cent
ralbanksell
ssecuri
ti
es.Ther
eser
vesofcommer ci
albanksarer educedandtheyarenoti
n
aposit
iontolendmoretothebusi
nesscommunit yorgeneralpubl
ic.

Furtherinvestmentisdiscouragedandt heri
seinpri
cesischecked.Contrar
iwi
se,when
recessionaryforcesstartintheeconomy ,
thecentr
albankbuyssecurit
ies.Thereser
vesof
commer ci
al banksareraisedsot heyl
endmor etobusi
nesscommuni tyandgener al
publ
ic.I
t
furt
herr ai
sesI nvest
ment ,output
,employment,i
ncomeanddemandi ntheeconomyhencet he
fall
inpr i
ceischecked.

c.Changesi
nReser
veRat
ios:

Underthismethod,CRRandSLRar etwomai ndepositrati

os,whi
chreduceori
ncr
easesthei
dle
cashbalanceofthecommer ci
albanks.Everybankisrequir
edbylawtokeepacert
ain
percent
ageofitstotal
deposit
sintheform ofareserv
ef undini
tsvaul
tsandal
soacertai
n
percent
agewiththecentr
albank.

Whenpr i
cesarer i
sing,thecentralbankrai
sesther eserv
erati
o.Banksar erequir
edtokeep
mor ewit
hthecent r
al bank.Theirr
eservesarereducedandt heylendless.Thev ol
umeof
i
nv est
ment,outputandempl oymentareadverselyaffect
ed.I
ntheopposi tecase,whenthe
reserv
erati
oislower ed,thereserv
esofcommer cialbanksarerai
sed.Theyl endmoreandthe
economicactiv
ityisfavourablyaff
ected.

d.Sel
ect
iveCr
edi
tCont
rol
s:

Selecti
vecreditcont r
olsar
eusedt oinf
luencespeci f
ictypesofcredi
tforparti
cularpurposes.
Theyusuallytaket heform ofchangi
ngmar ginrequirementstocontrolspecul
ativeacti
viti
es
withi
nt heeconomy .Whent herei
sbri
skspeculati
veact ivi
tyi
ntheeconomyori nparti
cular
sectorsincert
aincommodi tiesandpri
cesstartri
sing,thecentr
albankr ai
sesthemar gin
requir
ementont hem

Changei
nMar
ginMoney

Ther esul
tisthattheborr
owersaregivenlessmoneyinloansagai
nstspecif
iedsecur i
ties.For
i
nstance, r
aisi
ngthemar gi
nrequir
ementt o70%meanst hatthepl
edgerofsecurit
iesoft he
val
ueofRs10, 000will
begiven30%oft heirv
alue,
i.
e.Rs3,000asloan.I
ncaseofr ecessionina
par
ticularsector
,thecentr
albankencouragesborr
owingbyloweri
ngmar gi
nr equi
rement s.

MoralSuasi
on:
Underthi
smethodRBIur
gest
ocommer
cial
bankst
ohel
pincont
rol
l
ingt
he
suppl
yofmoneyintheeconomy.
Obj
ect
ivesoft
heMonet
aryPol
i
cyofI
ndi
a

1.Pri
ceStabi
li
ty:Pr
iceStabil
it
yimpliespromoti
ngeconomicdev el
opmentwithconsi
der
able
emphasisonpricestabil
i
ty.Thecentreoffocusi
stofaci
li
tatetheenvi
ronmentwhichi
s
fav
ourabl
etothearchitectur
ethatenablesthedev
elopmentalproj
ect
st or
unswiftl
ywhil
ealso
maint
aini
ngreasonablepricestabi
l
ity.

2.Contr
oll
edExpansi
onOfBankCredi
t:Oneofthei
mportantf
unct
ionsofRBIi
sthecont
rol
l
ed
expansi
onofbankcredi
tandmoneysupplywi
thspeci
alatt
ent
iont
oseasonalr
equir
ementfor
credi
twit
houtaf
fecti
ngtheout
put
.

3.PromotionofFi
xedInv
estment:Theaim her
eist
oincr
easet
hepr
oduct
ivi
tyofi
nvest
mentby
rest
rai
ningnonessent
ialf
ixedi
nvestment.

4.Restr
ict
ionofInventori
es:Overfi
l
lingofst
ocksandpr oductsbecomi ngoutdat
eddueto
excessofstockoftenresult
sissicknessoftheuni
t.Toav oidthisproblem t
hecent
ral
monetar
y
author
it
ycarri
esoutt hi
sessent i
alfunct
ionofr
estr
icti
ngt heinvent
ories.Themainobj
ect
iveof
thi
spoli
cyistoav oi
dov er-
stocki
ngandi dl
emoneyi ntheorganizati
on

5.Promoti
onofExportsandFoodProcurementOper
ati
ons:Monet
arypoli
cypaysspeci
al
att
enti
oninordertoboostexpor
tsandfaci
li
tat
ethet
rade.I
tisani
ndependentobj
ect
iveof
monetarypol
i
cy .

6.Desir
edDist
ri
buti
onofCr edi
t:Monetaryaut
hori
tyhascontr
olov
erthedecisi
onsregar
dingthe
al
locati
onofcr
editt
opr i
ori
tysectorandsmallborr
owers.Thi
spol
icydeci
desov ert
hespeci
fi
ed
percent
ageofcredi
tthati
st obeall
ocatedtopri
ori
tysect
orandsmallbor
rowers.

7.Equi
tabl
eDistr
ibut
ionofCr
edit
:Thepoli
cyofReserv
eBankaimsequi
tabl
edi
str
ibut
iont
oal
l
sect
orsoftheeconomyandallsoci
alandeconomiccl
assofpeopl
e

8.ToPr omot eEffi

ciency:Iti
sanotheressenti
alaspectwherethecentralbankspayalotof
att
enti
on.Ittriestoincreasetheeffi
ciencyi
nt hef
inancial
syst
em andt ri
estoincor
porate
str
ucturalchangessuchasder egul
atingint
erestr
ates,easeoperat
ionalconstr
aint
sinthecr
edi
t
del
iverysystem, t
ointroducenewmoneymar keti
nstrumentsetc.

9.ReducingtheRi
gidit
y:RBItr
iestobr i
ngaboutthefl
exibi
li
ti
esintheoperati
onswhichprovi
de
aconsiderabl
eautonomy .I
tencouragesmorecompet it
iveenvi
ronmentanddi v
ersi
fi
cati
on.I
t
maintai
nsitscont
roloverfi
nancialsyst
em wheneverandwher evernecessar
ytomaintai
nthe
di
scipli
neandprudenceinoperationsofthefi
nancial
system.

Concl
usi
on:

Soitcanbeconcludethatthei
mplementati
onofthemonetarypol
i
cyplaysav er
yprominent
rol
einthedevel
opmentofacount r
y.It
’sakindofdoubl
eedgesword,i
fmoneyi snotavai
labl
e
i
nthemar ketast
her equi
rementoftheeconomy,thei
nvest
orswil
lsuf
fer(i
nvestmentwil
l
decli
neintheeconomy )andontheot
herhandift
hemoneyi ssuppli
edmorethanit
s
requi
rementthenthepoorsecti
onofthecount
rywil
lsuf
ferbecausethepr
icesofessent
ial
commodi t
ieswil
lstar
trisi
ng.