monetary policy and role of its instruments

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CHANGE IN OBJECTIVES OFMONITARY POLICY AND USE OF

MONETARY INSTRUMENTS

Abu baker(091103)

Bhargav shaker(091113)

Kullbushan(091123)Priyanka suman(091133)

Sandeep(091143)

Sumana mitra(091155)



MONETARY POLICY

It is the part of economic policy which regulates the level of money in the economyIn order to regulate inflation, improve balance of payments,increase gross national

Product etc. RBI in case of INDIA controls monetary policy

The policy traditionally announced twice a year through which RBIinsures priceStability for economy

April –September slack season policy

October –march busyseason policy



THREE IMPORTANTOBJECTIVES

promote and encourage economic growth in thenomy

achieve price stability by controlling inflation andation

ensure economic stability at full employment orntial level of output



QUANTITATIVEINSTRUMENTS

1) Cash reserve ratio (CRR)

2)Statutory liquidity ratio (SLR)

3)Bank rate

4)Open market operations (OMO)

5)Repo and Reverse repo rate



CASH RESERVE RATIO

CRR or cash reserve ratio refers to a portion of deposits (as cash) which

Banks have to keep/maintain with RBI

CRR Interest rate investments



Post reform(1991-2009)



EFFECT OF CRR BY INFLATION

0

2

4

6

8

10

12

14

16

1 9 9 1

- 9 2

1 9 9 2

- 9 3

1 9 9 3

- 9 4

1 9 9 4

- 9 5

1 9 9 5

- 9 6

1 9 9 6

- 9 7

1 9 9 7

- 9 8

1 9 9 8

- 9 9

1 9 9 9

- 0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3

- 0 4

2 0 0 4

- 0 5

2 0 0 5

- 0 6

2 0 0 6

- 0 7

2 0 0 7

- 0 8

2 0 0 8

- 0 9

CRR

INFLATION



EFFECT OF CRR WITH GDP



STATUTORY LIQUIDITYRATIO

In India, RBI has imposed another reserve requirement in addition to CRR

it is called statutory liquidity ratio

The SLR is the proportion of the total deposits which commercial banks are

Statutorily required to maintain in the form of liquid assets in addition to

Cash reserve ratio



39 3835 3125 25 25 25 2524

01020304050

1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7 2 0 0 9

post reform(1991-2009)

SLR RAT



OPEN MARKETOPERATIONSAn important instrument of monetary policy, that Reserve bank of India purchases

And sells securities in open market operations

PU

R

C

H

A

S

E

S

SA

L

E

S

Contraction

of

Monetary policy

expansion

of

Monetary policy



0

20000

40000

60000

80000

100000

120000

1 9 9 6

- 9 7

1 9 9 7

- 9 8

1 9 9 8

- 9 9

1 9 9 9

- 0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3

- 0 4

2 0 0 4

- 0 5

2 0 0 5

- 0 6

2 0 0 6

- 0 7

2 0 0 7

- 0 8

2 0 0 8

- 0 9

OMO PURCHAS

OM O



0

2

4

6

8

10

12

14

16

1 9 9 6

- 9 7

1 9 9 8

- 9 9

2 0 0 0

- 0 1

2 0 0 2

- 0 3

2 0 0 4

- 0 5

2 0 0 6

- 0 7

2 0 0 8

- 0 9

INTRESTRATES

INTREST

RATES



BANK RATE

Bank rate is the minimum rate at which the central bank

provides loans to Commercial banks

It is also called discount rate because bank provides financeTo the commercial banks by rediscounting bill of exchange

When the general bank raises the bank rate, the commercial

bank raises their lending rates, it results in less borrowing and

Reduces money supply in the economy



PRE REFORM

6 6

7.5

9 9 910 10 10 10 10

0

2

4

6

8

10

12

19701972197419761978198019821984198619881990

BANK RATE

BANK RATE



POST REFORM

12 12 12 12 12

8 87.5

6 6 6 6 6 6

0

2

4

6

8

10

12

14

BANK RATE

BANK RATE



15 1413 12.512 12 11.511 10.7510.75

12.2512.251212 12

8 8 7.56 6 6 6 6 6 6 6

0

2

4

6

8

10

12

14

16

INTREST RATE

BANK RATE

INTREST RATE WITH EFFECT OF BANK RATE



REPO & REVERSE REPORATE

REPO RATE:

This is the rate at which the central bank funds to the monetary

Market

REVERSE REPO RATE:

The rate at which central bank borrows funds from the commercial banks



6 66.5

7.257.75 8

6.5

5.54.754.5

55.5

6 6 6

5

43.25

01

2

3

4

5

6

7

8

9

M a r

- 0 4

J u l

- 0 4

N o v

- 0 4

M a r

- 0 5

J u l

- 0 5

N o v

- 0 5

M a r

- 0 6

J u l

- 0 6

N o v

- 0 6

M a r

- 0 7

J u l

- 0 7

N o v

- 0 7

M a r

- 0 8

J u l

- 0 8

N o v

- 0 8

M a r

- 0 9

Reverse repo

Repo rate

REVERSE REPO AND REPO RATE



BANK RATE

%change

REVERSEREPO

%change

REPORATE

%change

CRR %change

SLR

%change

Mar-04

6 4.5 6 4.5 25

Oct-04 6 0 4.5 0.00% 6 0.00% 5 11.11% 25 0.00%

Apr-05 6 0 5 11.11% 6 0.00% 5 0.00% 25 0.00% Jan-06 6 0 5.5 10.00% 6.5 8.33% 5 0.00% 25 0.00%

Jul-06 6 0 6 9.09% 7 7.69% 5 0.00% 25 0.00%

Jan-07 6 0 6 0.00% 7.25 3.57% 5.5 10.00% 25 0.00%

Mar-07

6 0 6 0.00% 7.75 6.90% 6 9.09% 25 0.00%

Apr-07 6 0 6 0.00% 7.75 0.00% 6.5 8.33% 25 0.00%

Apr-08 6 0 6 0.00% 7.75 0.00% 7.75 19.23% 25 0.00%

May-08

6 0 6 0.00% 7.75 0.00% 8.25 6.45% 25 0.00%

Jun-08 6 0 6 0.00% 8.5 9.68% 8.25 0.00% 25 0.00%

Oct-08 6 0 6 0.00% 8 -5.88% 6 -27.27% 25 0.00%

Dec-08

6 0 5 -16.67% 6.5 -18.75% 5.5 -8.33% 24 -4.00%

Jan-09 6 0 4 -20.00% 5.5 -15.38% 5.5 0.00% 24 0.00%

Apr-09 6 0 3.25 -18.75% 4.75 -13.64% 5 -9.09% 24 0.00%

Feb-10 6 0 3.25 0.00% 4.75 0.00% 5.75 15.00% 25 4.17%



QUALITATIVEINSTRUMENTS

Selective credit control

Rationing of credit

Moral persuasion

Direct action



THANK YOU

monetary policy and role of its instruments

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