Oriental College of Management

Monetary Policy of India is formulated and executed by reserve bank of

India to achieve specific objectives.
The monetary policy is defined as discretionary act undertaken by the
authorities designed to influence
(A) the supply of money
(B) cost of money or rate of interest
(C) the availability of money for achieving specific objectives

The main elements of monitory policy are

(1) It regulates stock and growth rate of money supply
(2) It regulates the entire banking system of the economy
(3) It regulates the level and structure of interest rates directly in organised sector and
indirectly in unorganised sector
(4) It determines the allocation of loans among different sectors
 CD Deshmukh
The First Indian Governor of
Reserve Bank of India (RBI)
 OBJECTIVES OF
MONETARY POLICY

To attain price To Promote

Full employment
Stability economic growth

To attain exchange To Promote saving To Control Trade

stability and investment cycle

To Promote To Regulate Money

Employment Supply In Economy
 INSTRUMENTS OF MONETARY POLICY

Statutory Liquidity Open Market

Bank Rate
Ratio Operations

Repurchase Auction
Rate(Repo) and
Cash Reserve Ratio Reverse Repurchase Margin Requirement
Auction Rate
(Reverse Repo)

Credit Ceiling Direct Action Moral Persuasion

• Bank Rate is also known as discount rate. It is the rate at
which RBI lends to the commercial banks or rediscounts
their bills. If bank rate is increased ,then commercial banks
also charge higher rate of interest on loans given by banks
to public because now commercial banks get funds from
RBI at higher rate of interest. Higher rate of interest will
contract credit in the economy i.e. public will take lesser
loans because of higher rate of interest.
It means a certain percentage of deposits is to be kept by
banks in form of liquid assets. This is kept by bank itself the
liquid assets here include government securities, treasury
bills and other securities notified by RBI. If SLR is more,
then banks have to keep more part of deposits in specified
securities and banks will have less surplus funds for
granting loans. It will contract credit.SLR is fixed by RBI
and usually it has been ranging between 23% to 40%.
• It means that the bank controls the flow of credit through
the sale and purchase of securities in the open market.
When securities are purchased by central bank, then RBI
makes payment to commercial banks and public. So, the
public and commercial banks now have more money with
them. It increases money supply with commercial banks
and public. This will expand credit in the economy. In year
2012-13 RBI Purchases securities 8,000 crore.
• Cash Reserve Ratio is a certain percentage of bank deposits
which banks are required to keep with RBI in the form of
reserves or balances .Higher the CRR with the RBI lower will
be the liquidity in the system and vice-versa. RBI is
empowered to vary CRR between 15 percent and 3 percent.
But as per the suggestion by the Narshimam committee
Report the CRR was reduced from 15% in the 1990 to 5
percent in 2002.,
• CRR is 4.00%
Repo rate is the rate at which RBI lends to commercial banks
generally against government securities. Reduction in Repo
rate helps the commercial banks to get money at a cheaper
rate and increase in Repo rate discourages the commercial
banks to get money as the rate increases and becomes
expensive. Reverse Repo rate is the rate at which RBI
borrows money from the commercial banks. The increase in
the Repo rate will increase the cost of borrowing and
lending of the banks which will discourage the public to
borrow money and will encourage them to deposit. As the
rates are high the availability of credit and demand
decreases resulting to decrease in inflation. This increase in
Repo Rate and Reverse Repo Rate is a symbol of tightening
of the policy. the repo rate is 4%
• Margin is the difference between loan value and market value
of security. It is fixed by RBI. For different types of loans,
margin requirement is different .If margin % is more, then
less loan will be given for a certain value of security and vice
versa. E.g. if margin requirement is 20% then bank will give
maximum 80% of the market value of security as loan. For
priority sector, margin requirement is less and in areas where
credit is to be contracted margin requirement is increased.
Reserve bank can also exercise moral influence upon the
members banks with a view to pursue its monetary policy.
RBI convinces banks to curb loan to unproductive sectors.
From time to time reserve bank holds meetings with the
member banks seeking their cooperation in effectively
controlling the monetary system of the country. It advices
them to extend more credit to priority sector.
• According to 1949 act, Reserve bank can stop any
commercial bank from any type of transaction. In
case of defiance of the orders of reserve bank, it can
resort to direct action against the member bank. It
can stop giving loans and even recommend the
closure of the member bank to the central
government under pressing circumstances.
• In this operation RBI issues prior information or
direction that loans to the commercial banks will be
given up to a certain limit. In this case commercial
bank will be tight in advancing loans to the public.
They will allocate loans to limited sectors. Few
example of ceiling are agriculture sector advances,
priority sector lending.
 LIMITATIONS OF MONETARY POLICY
MEASURES

Poor Banking Underdeveloped Existence Of

Habit Money Market Black Money

Lack Of
Conflicting Coordination Lack Of Banking
Objectives With Fiscal Facilities
Policy

Limitations of
Monetary
Instruments