Monetary Policy & Credit Control

M.P refer to “ The use of instruments within the control of the central bank to influence the level of the
aggregate demand for goods & services by irrugalation of the money supply & credit objectives of
economic policies

Pg No:185

Objectives of MP

To assist mobilization of savings

To spread mobilization & monetary integration

To extend monetary support to authorities

To maintain general price stability & prevent inflation

Objectives of M.P

Price
Stability
Mobilization
of savings

Capital
formation Control
Regulation Agriculture

NABARD

Promote
investment
SEBI

Industry
Monetary IDBI
integration
 Instruments of Monetary Policy

Deposit Rates
Lending

Rates Open market

operation

Bank Rate
Statutory
liquidity rates
Instruments

Credit
Planning
Cash Reserve
Ratio

Moral

Suasion
Selective
Credit credit
Authorizations control

Selective Credit Control

Margin Requirements

Credit Control

Restriction on Credit

Credit Planning
Moral suasion ways:
Request

Persuasion

Periodic Meeting

Budget Decision

Formal letters

Open market Operations & Monetary Policy

OMO is the sale and purchase of government securities and treasury bells by RBI

On the central bank of the country

Its objectives is to regulate money supply in the economy

RBI comes out OMO thought commercial banks

When the C.B wants to infuse liquidity into the monetary system, it will buy government
securities on the open market. By this way it provides commercial banks with liquidity.

In contract, when it sells securities, it crabs liquidity. Then, control bank indirectly controls
money supply & Influences short team interest rates.

RBI employs 2 kinds of OMO’s

Outright purchase (PEOM) it is permanent & involves the outright selling or buying of
governments securities.

Repurchase Agreement (REPO) it is short term & one subject to repurchase.

Process of OMO

C.B maintains Zero accounts for a group of commercial banks-direct payments banks it
represents central bank money in the currency.

Open MO he conducted by simply increasing or decreasing (debit/credit) the amount of

electronics money that a bank has in its resource account at RBI.
Function of Central Bank –RBI

1.Monopoly of Note issue-note issue & the state

Principles of note issue

Partial Fiduciary system

Maximum Fiduciary system

Systems of Note issue Proportionate reserve system

Minimum reserve system

Foreign exchange reserve

2.Reserve requirements & currency regutation:

England negligible gold baking Vs stick gold.

3.Monetary Policy

Instruments of monetary policy

a. Bank Rate Policy

b. Open Market Operations

c. Variable Reverse System

d. Selective Credit Controls

e. Credit

f. Moral Suasion

g .Direct Action
Reserve bank of India
Its role in bank management & regulations

Is the apex financial institution of the country’s financial system entrusted with the task of

 Control
 Promotion
 Super vision
 Promotion development & planning

Came into existence on 1st April 1935 under RBI Act 934 the recommendation of Hilton Young
Commission

Origin of RBI
1773-waven Hastings the governor of Bengal(Governor-General)

1921-imperial bank was set up bill was passed is legislative assembly on dept 8, 1933. Which
got assert of the government general on March 6,1934 & became RBI Act 1934.

From Private Ownership to State Ownership

RBI fully paid share capital was Rs 5 crores dividend into shares of Rs 100 each of which
4,97,80,000 subscribed by private share holders and 2,20,000 were subscribed by central govt
for disposal of 2,200 shares.

After independence state ownership was planned & later nationalized RBI Act 1948 by paying
adequate compensation on Jan 1,1949.

Objectives of RBI:

Note issuing authority

 Bankers bank
 Bankers to govt
 Promote growth in economy to maintain price stability

The Indian financial system Pg:172 VASANT DOSAI

Roles of RBI pg:174

Functions of Central Bank

1. Monopoly of Note issue:

Public confidence,trade,electricity.

Note issue and state

Principle of Note issue

System of Note issue

Reserve requirement’s & currency regulation

a) Partial Fiduciary System

Fixed amount is laid down by law which need only be covered by government
securities. Notes above thin he fully backed by gold.
Ex.England 1844
b) Maximum fiduciary: USA 1866-1913 National Bank deposit bonds of Fed.bank.
c) Proportionate System: Germany 1913 Central bank to keep % of total note issue in gold.
The remainders was to be covered by discounted paper having a maturity of note more
then 3 months.
d) Minimum reserve requirement:
Minimum reserve & expend to volume of trade.
e) Foreign exchange reserves:
Cover Central bank by foreign securities with or without a minimum % of gold reserve
against notes & making the notes a first change on all assets of central bank.