FINANCIAL

MARKETS AND
INSTITUTIONS
Roles of Monetary Policy
 What is monetary policy?

• Controls interest rate payable on short term borrowing

• Controls the money supply
• It is used by govts to achieve macroeconomic objectives like inflation, growth etc
• Examples include government securities
 Tools of • Discount rate
• Reserve requirements
Monetary • Open market operations (Expansionary and

Policy
Contractionary)
• Interest on reserves
 Expansiory
and
contractionar
y
 Long term loans for industrial development
•Promote medium and long term loan policies

Roles of •Rediscounting facilities on loans

Monetary
Policy To bridge BOP deficit
•Control gap between imports and exports
•High interest rate attracts the inflow of foreign investments
 Roles of Monetary Policy

Adjustment between demand and supply

•Economic development increases demand of money
•It controls the supply and demand of money

Creation and expansion of financial institutions

•Monetary authority can improve the currency and credit system
•Monetary authority can help financial institutions by giving them subsidies
•and trainings to their staff
 Roles of Price stability
•Stable price and exchange rates are important
Monetary Policy •Inflationary increase in prices can cause devaluation

Equilibrium in balance of payments

•Imports increase but exports don’t increase to same level
•Monetary policy can adopt direct foreign exchange
controls
Suitable interest rate
•Suitable interest rates helps easy borrowing from public
and private sector
•Low interest rates attract investors
•Sometimes high interest rates are suitabl

Debt Management
•Large scale borrowings
•Increase public borrowing from year to year
Roles of Monetary Rural credit system
•Farmers don’t have proper

Policy financing sources

•Monetary policy should give
loans to poor farmers