Presentation

• On MONETARY POLICY

By:- NIPUN NIKUNJ

OVERVIEW

• Introduction• Characteristics • Aim• objective• Major Players • Types• Operations of monitory policy• RBI annual policy statement 13

Presentation

OnMONETARY POLICY

By:NIPUN NIKUNJ

What is Monetary Policy• The term monetary policy refers to actions taken by central banks

to affect monetary magnitudes or other financial conditions

• Attempts to influence the level of economic activity through changes to the amount of money in circulation and the price of money – short-term interest rates

• The money supply can/does influence price levels

Inflation occurs if the money supply increases, ceteris paribus.

Deflation occurs if the money supply decreases, ceteris paribus.

Continue…. • Interest rates the key area of Monetary Policy• Basis of Monetary Policy is that there is a long run

relationship between the amount of money and inflation

Main circumstances:- (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a

set of objectives oriented towards the growth and stability of the economy.

Aims of Monetary policy

• MP is a part of general economic policy of the government

• Thus MP contributes to the achievement of the goals of economic policy

• MP also fulfill following aims also:-

Full employmentStable exchange rateEconomic growthReasonable Price StabilityGreater equality in distribution of income & wealthFinancial stability

OBJECTIVES OF MONETARY POLICY

Price stability Credit availability Stability of exchange rate Full employment High rate of economics growth Distribution of money

Price Stability: The Dominant Objective

• There is convergence of views in developed and developing economies, that price stability is the dominant objective of monetary policy.

• Price stability does not mean complete year-to-year price stability which is difficult to attain.

• Price stability refers to the long run average stability of prices.

• Price stability involves avoidance of both inflationary and deflationary pressures.

Continue…

• Price Stability contributes improvements in the standard of living of people.

• It promotes saving in the economy while discouraging unproductive investment.

• Price stability leads to interest rate stability, and exchange rate stability (via export import stability).

• It contributes to the overall financial stability of the economy.

Major players

Reserve Bank presidents

Chair of the Board of Governors

6 Governors of the Board

Federal Open Market Committee(FOMC)Direct open market operationsAdvises on discount rate and reserve requirements

Board of GovernorsApproves discount ratesset reserve requirementDirects regulatory operations

Types of monetary policyThe distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals

Monetary Policy: Target Market Variable: Long Term Objective:

Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI

Price Level Targeting Interest rate on overnight debt A specific CPI number

Monetary Aggregates The growth in money supply A given rate of change in the CPI

Fixed Exchange Rate The spot price of the currency The spot price of the currency

Gold Standard The spot price of gold Low inflation as measured by the gold price

Mixed Policy Usually interest rates Usually unemployment + CPI change

Instruments of Monetary Policy

• Variations in Reserve Ratios

• Discount Rate (Bank Rate) (also called rediscount rate)

• Open Market Operations (OMOs)

• Other Instruments

RBI Annual Policy Statement

The Statement consists of two parts:Part I. Annual Statement on Monetary Policy for the Year 2012-13; and Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2012-13

• First Quarter Review in July • Mid-term Review in October,• Third Quarter Review in January

Monetary policy Consists:-

• The State of The EconomyGlobal EconomyDomestic economy

InflationMonetary Aggregates

Monetary Measures

Repo Rate under LAF- 7.75% (Decreased from 8.00%)

Cash Reserve Ratio (CRR)- 4.00%(Decreased from 4.25%)

Bank Rate- 8.75%(decrease from 9.0- previous quater)

Statutory Liquidity Ratio (SLR)- 23%Reverse Repo Rate under LAF- 6.75%

(Decreased from 7.00%)