the monetary policy uses three tactics to maintain the monetary stability. they are money supply ...
TRANSCRIPT
![Page 1: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/1.jpg)
TACTICS & TOOLS OF MONETARY POLICY
![Page 2: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/2.jpg)
TACTICS FOLLOWED BY MONETARY POLICY:
The monetary policy uses three tactics to maintain the monetary stability. They are
Money supply Money demand Managing the risks within banking
system
![Page 3: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/3.jpg)
MONEY SUPPLY
This mainly involves buying(expanding the money supply) or selling(contracting the money supply) of government securities or bonds.
The central banks calls this as “open market operations” where the central government buys and sells securities in public market.
When the central bank disburses or collects the payment, the amount in the economy changes, and this change in turn affects the interbank interest rates.
![Page 4: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/4.jpg)
MONEY DEMAND
Demand for money is sensitive to price.The price of money is the interest paid by the
borrowers.
Setting interest rates in order to manage money demand is the major tool used by the central banks.
The central banks control the interbank interest rates by raising or lowering its interest rate target for the interbank interest rates.
This rate is called as “bank rate”
![Page 5: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/5.jpg)
MANAGING THE RISKS WITHIN BANKING SYSTEM
This involves of maintenance of reserves with central banks for expansionary activities.
Banks must keep banking reserves to handle cash needs.
Central banks manage systematic risks by balancing the expansionary economic activities by bank lending and control of inflation through reserve requirements.
![Page 6: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/6.jpg)
MONETARY POLICY IN INDIA
The monetary policy in India is controlled using following tools,
Open market operation(OMO) Bank rate Cash reserve ratio(CRR) Statutory liquid ratio(SLR) Repo rate & reverse repo rate Credit control Moral suasion
![Page 7: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/7.jpg)
OPEN MARKET OPERATIONS
This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit.
The RBI sells government securities to contract the flow of credit and buys government securities to increase credit flow.
Open market operation makes bank rate policy effective and maintains stability in government securities market.
![Page 8: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/8.jpg)
CASH RESERVE RATIO
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
![Page 9: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/9.jpg)
STATUTORY LIQUID RATIO
Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities.
These assets can be cash, precious metals, approved securities like bonds etc.
The ratio of the liquid assets to time and demand liabilities is termed as the Statutory liquidity ratio.
![Page 10: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/10.jpg)
BANK RATE POLICY
It is also known as the discount rate, is the rate of interest charged by the RBI for providing funds or loans to the banking system.
Funds are provided either through
lending directly or rediscounting or buying money market instruments like commercial bills and treasury bills.
![Page 11: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/11.jpg)
BANK RATE POLICY…
Bank Rate increases the cost of borrowing by commercial banks which results into the reduction in credit volume to the banks and hence declines the supply of money.
Increase in the bank rate is the symbol of tightening of RBI monetary policy
![Page 12: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/12.jpg)
CREDIT CEILING OR CREDIT CONTROL
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.
Eg: agriculture sector advances priority sector lending.
![Page 13: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/13.jpg)
MORAL SUASION
Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and measures in so and so trend of the economy.
RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation.
![Page 14: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/14.jpg)
REPO RATE & REVERSE REPO RATE
Repo rate is the rate at which RBI lends to commercial banks generally against government securities
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks.
![Page 15: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/15.jpg)
REPO & REVERSE REPO RATE…
Reduction in Repo rate helps the commercial banks to get money at a cheaper rate
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.
![Page 16: The monetary policy uses three tactics to maintain the monetary stability. They are Money supply Money demand Managing the risks within banking](https://reader036.vdocument.in/reader036/viewer/2022071806/56649dbc5503460f94aaed97/html5/thumbnails/16.jpg)
CURRENT RATES
TOOLS
RATE(%)
Statutory liquid ratio(SLR) 22
Cash reserve ratio(CRR) 04
Repo rate 08
Reverse repo rate 07
Bank rate 09
Inflation rate 08