MONETARY POLICY

RBI AND MONETARY POLICY IN

INDIA
 MONETARY MAGNITUDES

• M1 = CURRENCY WITH PUBLIC+

DEMAND DEPOSITS WITH BANKS+
• M2 = M1+ POST OFFICE DEPOSITS

• M3 = M1+ TIME DEPOSITS WITH BANKS

• M4 = M3+ TOTAL POST OFFICE DEPOSITS

 WHAT IS MONETARY POLICY?�

• THE TERM MONETARY POLICY REFERS TO ACTIONS

TAKEN BY CENTRAL BANKS TO AFFECT MONETARY
MAGNITUDES OR OTHER FINANCIAL CONDITIONS.
• MONETARY POLICY OPERATES ON MONETARY
MAGNITUDES OR VARIABLES SUCH AS MONEY
SUPPLY, INTEREST RATES AND AVAILABILITY OF
CREDIT.
• MONETARY POLICY ULTIMATELY OPERATES
THROUGH ITS INFLUENCE ON EXPENDITURE FLOWS
IN THE ECONOMY.
• IN OTHER WORDS AFFECTS LIQUIDITY AND BY
AFFECTING LIQUIDITY, AND THUS CREDIT, IT
AFFECTS TOTAL DEMAND IN THE ECONOMY.
 AIMS OF MONETARY POLICY
• MP IS A PART OF GENERAL
ECONOMIC POLICY OF THE GOVT.
• THUS MP CONTRIBUTES TO THE
ACHIEVEMENT OF THE GOALS OF
ECONOMIC POLICY.
• OBJECTIVE OF MP MAY BE:
FULL EMPLOYMENT
STABLE EXCHANGE RATE
HEALTHY BOP.
struments
OPERATION OF
Discount Rate
(Bank Rate)
MONETARY POLICY
Reserve Ratios Operating
Target
Open Market
Operations
• Monetary Base
• Bank Credit Intermediate
• Interest Rates Target
• Monetary
Aggregates(M3)
Ultimate
• Long term Goals
interest rates
• Total Spending
• Price Stability
Etc.
INSTRUMENTS OF MONETARY POLICY

• VARIATIONS IN RESERVE RATIOS

• DISCOUNT RATE (BANK RATE)
(ALSO CALLED REDISCOUNT RATE)
• OPEN MARKET OPERATIONS (OMOS)
• OTHER INSTRUMENTS
 VARIATIONS IN RESERVE RATIOS

• BANKS ARE REQUIRED TO MAINTAIN A CERTAIN PERCENTAGE OF

THEIR DEPOSITS IN THE FORM OF RESERVES OR BALANCES
WITH THE RBI
• IT IS CALLED CASH RESERVE RATIO OR CRR
• SINCE RESERVES ARE HIGH-POWERED MONEY OR BASE MONEY,
BY VARYING CRR, RBI CAN REDUCE OR ADD TO THE BANK’S
REQUIRED RESERVES AND THUS AFFECT BANK’S ABILITY TO
LEND.
OPEN MARKET OPERATIONS (OMOS

• OMOS INVOLVE BUYING (OUTRIGHT OR TEMPORARY) AND SELLING

OF GOVT SECURITIES BY THE CENTRAL BANK, FROM OR TO THE
PUBLIC AND BANKS.
• RBI WHEN PURCHASES SECURITIES, PAYS THE AMOUNT OF MONEY
BY CREDITING THE RESERVE DEPOSIT ACCOUNT OF THE SELLER’S
BANK, WHICH IN TURN CREDITS THE SELLER’S DEPOSIT ACCOUNT
IN THAT BANK.
 EXTERNAL DEVELOPMENTS

• IN US DOLLAR TERMS, MERCHANDISE EXPORTS INCREASED BY

24.7 PER CENT DURING 2005-06 AS COMPARED WITH 26.4 PER
CENT IN THE PREVIOUS YEAR. IMPORTS SHOWED AN INCREASE OF
31.5 PER CENT AS COMPARED WITH 36.4 PER CENT IN THE
PREVIOUS YEAR.
• WHILE THE INCREASE IN OIL IMPORTS WAS HIGHER AT 46.8 PER
CENT AS COMPARED WITH 45.2 PER CENT IN THE PREVIOUS YEAR,
NON-OIL IMPORTS SHOWED AN INCREASE OF 25.6 PER CENT AS
COMPARED WITH 33.3 PER CENT IN THE PREVIOUS YEAR.
• INDIA’S FOREIGN EXCHANGE RESERVES INCREASED BY US $ 10.1
BILLION FROM US $ 141.5 BILLION AT END-MARCH 2005 TO US $
151.6 BILLION BY END-MARCH 2006.
AS ON 18TH APRIL 2006:
MONETARY MEASURES
• BANK RATE KEPT UNCHANGED AT 6.0 PER CENT.
• REVERSE REPO RATE AND REPO RATE KEPT UNCHANGED AT 5.5 PER CENT
AND 6.5 PER CENT, RESPECTIVELY.
• CASH RESERVE RATIO (CRR) KEPT UNCHANGED AT 5.0 PER CENT.

AS ON 15TH OCT 2006:

POLICY RATES
• BANK RATE: 6%
• REPO RATE: 7%
• REVERSE REPO RATE: 6%

RESERVE RATIOS
• CRR: 5%
• SLR: 25%
THANKYU SO MUCH.!😅😅�