MEASURES TO CORRECT DEFICIENT AND EXCESS DEMAND

MONETARY POLICY(MONETARY MEASURES)

• MONETARY POLICY : HERE WE HAVE DESCRIBED THE COMPONENTS OF MONETARY

POLICY AND THE WAY THESE ARE USED TO CORRECT THE SITUATION OF EXCESS DEMAND
(INFLATIONARYNGAP) AND DEFICIENT DEMAND (ḌEFLATIONARY GAP). APPLICATION OF
MONETARY INSRTUMENT TO CORRECT EXCESS DEMAND AND DEFICIENT DEMAND IS DISCUSSED
SEPERATELY , AS UNDER :

• APPLICATION OF MONETARY INSTRUMENTS TO CORRECT THE SITUATION OF EXCESS DEMAND :

• Bank Rate And Repo Rate Are Raised By The RBI: AS A FOLLOW UP ACTION , MARKET RATE OF
INTEREST IS RAISED BY THE COMMERCIAL BANKS . COST OF BORROWING RISES . IT LOWER THE
DEMAND FOR CREDIT LEADING TO A CUT IN CONSUMPTION AND INVESTMENT EXPENDITURE IN
THE ECONOMY . IMPLYING A CUT IN AD , AS DESIRED TO CURB EXCESS DEMAND OR
INFLATIONARY GAP.
: REVERSE REPO RATE IS RAISED BY THE RBI : THIS INDUCES THE COMMERCIAL BANKS TO PARK THEIR
SURPLUS FUNDS WITH THE RBI . ACCORDINGLY , LESSER FUNDS ARE USED AS CRR-DEPOSITS FOR THE
CREATION OF CREDIT . AVAILABLITY OF CREDIT IS REDUCED

: PURSUING THE POLICY OF OPEN MARKET OPERATION : SECURITY ARE SOLD BY THE RBI TO SOAK LIQUIDITY
. ACCORDINGLY CASH RESERVES OF THE COMMERCIAL BANK ARE REDUCED, IMPLYING A CUT IN CREDIT
CREATION CAPACITY . WHEN THE AVAILABILITY OF CREDIT REDUCES , AD SHRINKS . ACCORDINGLY , EXCESS
DEMAND IS CORRECTED

: CRR IS RAISED TO LOWER CREDIT CREATION CAPACITY OF THE COMMERCIAL BANK : LESSER AVAILABILITY
OF CREDIT CAUSES A FALL IN AD . ACCORDINGLY , EXCESS DEMAND IS CORRECTED.

: SLR ( STATUTARY LIQUIDITY RATIO) IS RAISED : IT GIVES A WARNING SIGNAL TO THE COMMERCIAL BANK
TO MENTAIN HEALTHY CASH RESERVE WITH THEMSELVES . LESSER FUND ARE PARKED WITH RBI AS CRR
RESERVE . SUPPLY OF CREDIT IS REDUCED AND AD IS LOWERED . EXCESS DEMAND IS CORRECTED .

: MORAL PRESSURE IS EXERTED BY THE RBI : ON THE COMMERCIAL BANKS TO BE SELECTIVE AND STRICT IN
LENDING WHEN AD NEEDS TO BE CURBED TO CORRECT THE SITUATION OF EXCESS DEMAND OR
INFLATIONARY GAP .

MONEY POLICY IS PURSUED TO CURB EXCESS DEMAND. THIS POLICY REDUCES THE AVAILABILITY OF CREDIT
AND INCREASES THE COST OF CREDIT . LOWER DEMAND FOR CREDIT TO A FALL IN AD , IMPLYING THE
CORRECTION OF EXCESS DEMAND