MONETARY POLICY

BY JOMY
 INTRODUCTION TO MONETARY POLICY

o Monetary policy is the policy of central bank/government to control the credit and
money supply to achieve sustainable economic growth.
o Monetary policy helps to prevent the inflation and deflation.
o Monetary policy can be broadly classified into expansionary or contractionary.
 IMPORTANCE OF MONETARY
POLICY
 To control credit and money supply.
 To avoid inflation and deflation.
 To attain sustainable economic growth.
 To attain a balance growth.
 INSTRUMENTS OF MONETARY
POLICY Instruments

1. BANK RATE
Bank Rate
Bank rate is the rate at which the central bank lends money to the commercial
banks. In this case, there is no repurchasing agreement signed , no security sold or collateral
involved. Bank rate increases when there is inflation and decreases when there is deflation. Open Market
Operation

Reserve
2. Open Market Operation Requirements

Market operations are the operations of purchase and sale of securities. Open
market operations sells the securities during inflation period and purchase securities during SLR

deflation period .
Example: CRR

If federal bank buys the government securities they pay with new money that gets added to
the server of the banking system. Repo Rate

Reverse Repo
rate
3. Reserve Requirements
Reserve requirements are the amount of funds that a bank holds in reserve to
ensure that if it is able to meet liabilities in case of sudden withdrawals. Reserve
requirements are increased in the period of inflation and decreased in the period of deflation.
Example:
Bank XYZ has Rs.400 million in deposits . The federal receives reserve requirement in 10%
which means the bank XYZ must keep at least Rs.240 million in an account at federal
reserve bank and may not use that cash for lending or any other purpose.

4. Cash Reserve Ratio (CRR)

The commercial bank have to keep a certain percentage of the demand deposit with
the Reserve Bank of India (RBI).
Example:
When someone deposits Rs.100 with a bank , it increases the deposits of the bank by
Rs.100. If the CRR is 9%, then the bank will have to hold additional Rs.9 with the central
bank. This means that the commercial bank will be able to use only Rs.91 for investment /
lending or credit purpose.
5. Statutory Liquidity Ration ( SLR)
SLR is the minimum percentage of deposits that a commercial bank has to
maintain in the form of liquid cash, gold or other securities. This is also known as
reserve requirement that the bank are expected to keep before offering credit.

6. Repo Rate
Repo Rates are the rate at which the central bank lends to the commercial
banks. Repo rate also decides the liquidity rate in the banking system.
Example:
IF the repo rate is 10% and the loan amount borrowed by commercial bank from
RBI is Rs.10,000, Then the interest paid to the RBI will be Rs.1,000.
7.Reverse Repo
It is the rate at which the central bank borrows money from the commercial
banks. In other words, It is the rate at which commercial banks in India place their
excess money with Reserve Bank of India usually for a short period.
 CONCLUSION
o Monetary policy is the policy of central bank/government to control the credit and
money supply to achieve sustainable economic growth.
o Instruments of Monetary policies are:
o Bank Rate
o Open Market Operation
o Reserve requirement
o Cash Reserve Ratio (CRR)
o Statutory Liquidity Ration ( SLR)
o Repo Rate
o Reverse Repo