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