ANEEQA MARYAM

ROLL NO. 20
 QUANTITATIVE TOOLS OF
MONETARY POLICY

 BANK RATE POLICY / DISCOUNT RATE

 CHANGE IN RESERVE RATIO
 CREDIT RATIONING
 BANK RATE POLICY

DEFINE:
“The rate of interest that is charged by a
central bank while lending or giving loans to
a commercial bank.”
EXAMPLE:
 May 24,2022 13.75%
 Jul 12,2022 13.75%
 Jul 13,2022 15.00%
 Oct 18,2022 15.00%
BANK RATES IN CASE OF INFLATION

High bank High market

rate interest

Fall in
Rise in cost
demand for
capital
loans

Fall in money Inflation can

supply be controlled
IN CASE OF DEFLATION
Low bank Low market
rate interest

Rise in
Fall in cost
demand for
capital
loans

High money Deflation can

supply be controlled
 HOW BANK RATE WORKS?

 The Bank Rate in the united states is often

referred to as the Discount Rate.
 In United States, the Board of the Governors of
the Federal Reserve System sets the discount
rate as well as the reserve
 The Federal Open Market Committee(FOMC)
buys or sells Treasury securities to regulate
money supply.
 Together, the discount rate, value of treasury
bonds and reserve requirements have a huge
impact on economy.
 TYPES OF BANK RATE

 PRIMARY CREDIT
 SECONDARY CREDIT
 SEASONAL CREDIT
 KEY TAKEAWAYS
 Interest rate is charged by a nations central
bank.
 The Board of Governors set the bank rate.
 The Bank may increase or decrease the
discount rate to slow down or stimulate
economy.
 Three types of credit.
 Contrary to the Bank rate, the overnight rate
is the interest rate charged by banks loaning
funds to each other.
 RESERVE RATIO

“The reserve ratio is the portion of

reservable liabilities that commercial
banks must hold onto , rather than lend
out or invest. It is also called Cash
Reserve Rate.”
Example:
NOV 12,2021 6%
NOV 15,2021 4%
CURRENTLY 21 MAY, 2022 4.50%
FORMULA:
CHANGE IN RESERVE RATIO:
HOW IT AFFECTS ECONOMY ?
RISE FALL

 Increase in demand  Decline in reserve

for reserves to requirements leads
increase interest to more money
rate. supply and
decreases interest
rate.
 CREDIT RATIONING:

DEFINE:
“It refers to the situation in which Central
Bank refuses credit to borrowers who need
money and are ready to pay a higher
interest rate.”
IN CASE OF INFLATION
Introduce credit rationing

Decrease in supply of
money by commercial banks

Decrease in money supply

Inflation can be controlled

IN CASE OF DEFLATION
Stop credit
rationing

Increase credits by
commercial banks

Increase in money
supply

Deflation can be
controlled
 CATEGORIES:

 Adequate Collateral
 Redlining
 Pure Credit rationing
 Disequilibrium
 WAYS TO DEAL WITH THE
ISSUE:

 Putting Cap on amount of money

 Interest is charged
 Low interest rate on low income groups
 To keep things under control.
THANKS