MONETARY POLICY MEASURES

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MONETARY POLICY MEASURES

• CENTRAL BANK

How does the Central Bank control Money Supply or
Flow of Credit in the Economy?
2

• Monetary Policy the Policy which is related
  with the Money supply and credit availability of
  the Economy.
• Quantitative instruments
• Qualitative instruments

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Quantitative Instruments- which affect overall
money supply in the economy do not direct or
restrict the flow of credit to some specific
sectors of the economy.

• Bank Rate
• Open Market Operations
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)

4
Qualitative Instruments- which focus on the
alternative uses of credit in the economy direct
or restrict the flow of credit to some specific
sectors of the economy.

• Margin requirements
• Rationing of Credit
• Moral Suasion
• Direct Action

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BANK RATE Rate at which the central bank is
lending to the commercial banks.
INFLATION
COMMERCIAL BANK
BANK RATE
CENTRAL BANK
MKT. RATE OF INT.
Credit contracts
Money SS falls
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DEFLATION
COMMERCIAL BANK
CENTRAL BANK
BANK RATE
Credit EXPANDS
MKT. RATE OF INT.
Money SS RISES
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OPEN MARKET OPERATIONS

• REFER TO THE SALE AND PURCHASE OF SECURITIES IN
  THE OPEN MARKET BY THE Central bank through
  commercial banks to public.
• Central bank sells the securities to reduce the
  money supply.
• Central bank buys the securities to increase the
  money supply.

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CASH RESERVE RATIO

• It refers to the minimum percentage of a banks
  total deposits required to be kept with the
  Central Bank in the form of cash reserves.
• HIGH CRR less credit availability will reduce
  the money supply.
• Low CRR more credit availability will increase
  the money supply.

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Statutory Liquidity Ratio (SLR)

• Every bank is required to maintain a fixed
  percentage of its assets in the form of cash or
  other liquid assets, called SLR.
• HIGH SLR less credit availability will reduce
  the money supply.
• Low SLR more credit availability will increase
  the money supply.

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QUALITATIVE INSTRUMENTS

• MARGIN REQUIREMENT
• The margin requirement of loan refers to the
  difference between the current value of the
  security offered for loans and the value of loans
  granted.
• EG. Mortgaged article worth Rs.100 with the bank
  and bank gives loan of Rs.80.

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• RATIONING OF Credit
• It refers to fixation of credit quotas for
  different business activities.
• The commercial banks cannot exceed the quota
  limits while granting loans.

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• MORAL SUASION
• It is a combination of both persuasion and
  pressure.
• The Central bank tries to persuade the
  commercial banks to follow its directives of
  monetary policy. Otherwise, it can pressurise
  them to follow its policy directives.

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• DIRECT ACTION
• The central bank may initiate direct action
  against member banks in case these do no comply
  with its directives.
• Direct action includes de-recognition of a
  commercial bank as a member of the countrys
  banking system.

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Global Inflation - The IMF expects that the high
levels of slack in resource utilisation and
stable inflation expectations will contain global
inflationary pressures in 2010. In the advanced
economies, headline inflation is expected to
increase from zero in 2009 to 1.3 per cent in
2010, as rising energy prices may more than
offset deceleration in wage levels. In emerging
and developing economies, inflation is expected
to rise to 6.2 per cent in 2010 from 5.2 per cent
in 2009 due to low slack in resource utilisation
and increased capital inflows.
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The stance of monetary policy of the Reserve
Bank for the remaining period of 2009-10 will be
as follows Anchor inflation expectations and
keep a vigil on the trends in inflation and be
prepared to respond swiftly and effectively
through policy adjustments as warranted. Actively
manage liquidity to ensure that credit demands of
productive sectors are adequately met consistent
with price stability. Maintain an interest rate
environment consistent with price stability and
financial stability, and in support of the growth
process.
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Monetary Measures On the basis of the current
assessment and in line with the policy stance as
outlined in Section III, the Reserve Bank
announces the following policy measures Bank
Rate The Bank Rate has been retained at 6.0 per
cent. Repo Rate The repo rate under the
Liquidity Adjustment Facility (LAF) has been
retained at 4.75 per cent. Reverse Repo Rate The
reverse repo rate under the LAF has been retained
at 3.25 per cent.
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Cash Reserve Ratio It has been decided to
increase the cash reserve ratio (CRR) of
scheduled banks by 75 basis points from 5.0 per
cent to 5.75 per cent of their net demand and
time liabilities (NDTL) As a result of the
increase in the CRR, about Rs. 36,000 crore of
excess liquidity will be absorbed from the
system. The Reserve Bank will continue to monitor
macroeconomic conditions, particularly the price
situation closely and take further action as
warranted. Presently, the SLR is 25 with effect
from 7 November, 2009. It was raised from 24 in
the RBI policy review on 27 October, 2009.