SUBMITTED BY-

ARPITA SHUKLA
SEC A
Definition:
 The part of the economic policy which regulates the level of
money in the economy in order to achieve certain objectives
 In INDIA,RBI controls the monetary policy. It is announced
twice a year, through which RBI , regulate the price stability
for the economy
Economic policies for Stabilization

Economic
Policy

Monetary
Fiscal Policy
Policy
Objectives of monetary policy
 Controlled Expansion Of Bank Credit
 High rate of growth.
 To Promote Efficiency.
 Price stability.
 Greater equality in the distribution of income and
wealth.
 Healthy balance in balance of payments(BOP).
Tools Of Monetary Policy/Credit Control
Method

Quantitative Qualitative
Quantitative Measures
Bank Rate (5.65%)
 The bank rate, 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 discounting
or buying money market instruments like commercial bills
and treasury bills.
 Increase in bank rate increases the cost of borrowing by
commercial banks which results in the reduction in credit volume
to the banks and hence the supply of money declines. Increase in
the bank rate is the symbol of tightening of RBI monetary policy.
Repo Rate
 Repo Rate: We all approach banks when we face a financial shortfall. Likewise,
banks approach the Central Bank, which is the Reserve Bank of India in our
country, if they face a financial crisis. Repo Rate or repurchase rate is the rate at
which the RBI lends funds to commercial banks and other financial
 The current Repo Rate as fixed by the RBI is 5.40%.institutions within
the country.
 On 7 August 2019, the Reserve Bank of India lowered the repo rate (key
lending rate) by 35 basis points (bps). This is the fourth time this year that the
repo rate has been cut by the RBI.
 For example: If the Repo Rate is 10% and the loan amount borrowed by a
commercial bank from RBI is Rs 10,000, then the interest paid to the RBI will
be Rs 1,000.
Reverse Repo Rate:
 When Reserve Bank of India faces a financial crunch, they
invite commercial banks and other financial institutions to
deposit their excess funds into RBI treasury and offers them
excellent interest rates. Similarly, when banks have excess
funds, they voluntarily transfer it to RBI as their money is
safe and secure with them. Generally, Reverse Repo Rate is
always lesser than Repo Rate.
 The Reverse Repo Rate was lowered by the RBI to
6.00% on 7 February 2019, followed by another
reduction to 5.75% on 4 April, 2019. It was further
brought down to 5.50% on 6 June 2019.
Cash Reserve Ratio (CRR)
 In India, banks are required to retain a certain percentage of their
deposits as liquid cash with RBI. The percentage of the deposits
that should be kept aside by banks is called Cash Reserve Ratio.
 For example: If the bank deposit amount is Rs.100 and the CRR
is 10% p.a., the liquid cash that the bank should have at all times is
Rs.10. The remaining funds, which is Rs.90 in this case can be
used for lending and investment purposes
 RBI has the power to determine the lending capacity of the banks
in India through CRR. They will increase CRR if they want to
reduce the amount that the banks can lend and vice versa. The
current CRR is 4% p.a.
Statutory Liquidity Ratio (SLR):
 At the end of every business day, banks are required to
maintain a minimum ratio of their Time liabilities (when the
bank has to wait to redeem their liabilities) and Net Demand
(when bank can withdraw money from these accounts
immediately) in the form of liquid assets like gold, cash and
government securities. The ratio of time liabilities and liquid
assets in demand is called Statutory Liquidity Ratio or
SLR. The maximum SLR that The Reserve Bank of
India can set is 40% p.a. However, the current SLR is
set at 18.75% p.a.
Qualitative Measures Of Monetary
Policy
 The qualitative measures do not regulate the total
amount of credit created by the commercial banks. These
measures make distinction between good credit and bad
credit and regulate only such credit, which creates
economic instability. Therefore, qualitative measures are
known as the selective measure
(i) Prescription of margins
requirements:
 Generally, commercial banks give loan against ‘stocks or ‘securities’. While
giving loans against stocks or securities they keep margin. Margin is the
difference between the market value of a security and its maximum loan value.
Let us assume, a commercial bank grants a loan of Rs. 8000 against a security
worth Rs. 10,000. Here, margin is Rs. 2000 or 20%.
 central bank can encourage borrowing from the commercial banks by reducing
the margin requirement. When there is a grater flow of credit to different
business activities, investment is increased. Income of the people rises. Demand
for goods expands and deflationary situation is controlled.
 Thus, margin requirement is a significant tool in the hands of central bank to
counter-act inflation and deflation.
ii) Consumer credit regulation:
 Now-a-days, most of the consumer durables like T.V., Refrigerator, Motorcar,
etc. are available on installment basis financed through bank credit. Such credit
made available by commercial banks for the purchase of consumer durables is
known as consumer credit.
 If there is excess demand for certain consumer durables leading to their high
prices, central bank can reduce consumer credit by (a) increasing down
payment, and (b) reducing the number of installments of repayment of such
credit.
 On the other hand, if there is deficient demand for certain specific commodities
causing deflationary situation, central bank can increase consumer credit by (a)
reducing down payment and (b) increasing the number of installments of
repayment of such credit.
(iii) Moral suasion:
 Moral suasion means persuasion and request. To arrest
inflationary situation central bank pursuades and request the
commercial banks to refrain from giving loans for speculative
and non-essential purposes. On the other hand, to counteract
deflation central bank pursuades the commercial banks to
extend credit for different purposes.
 Central bank also appeals commercial banks to extend their
wholehearted co-operation to achieve the objectives of
monetary policy. Being the monetary authority directions of
the central bank are usually followed by commercial banks.
v) Direct Action:
 This method is adopted when a commercial bank does not
co-operate the central bank in achieving its desirable
objectives. Direct action may take any of the following
forms:
 Central banks may charge a penal rate of interest over and
above the bank rate upon the defaulting banks;
 Central bank may refuse to rediscount the bills of those banks
which are not following its directives;
 Central bank may refuse to grant further accommodation to
those banks whose borrowings are in excess of their capital
and reserves.
highlights of RBI’s Current bi-monthly
monetary policy statement
 On the basis of an assessment of the current and evolving
macroeconomic situation, the Monetary Policy Committee
 reduce the policy repo rate under the liquidity adjustment facility (LAF)
by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with
immediate effect. Consequently, the reverse repo rate under the LAF
stands revised to 5.15 per cent.
 Inflation expectations of households remained unchanged in the July
2019 round of the Reserve Bank’s survey for the three months ahead
horizon as compared with the previous round, but they moderated by 20
basis points for the one year ahead horizon. Input cost pressures from
prices of agricultural and industrial raw materials continued to ease in
May and June. Nominal growth in rural wages was muted, while growth
in staff costs in the manufacturing sector eased in Q1. Manufacturing
firms participating in the Reserve Bank’s industrial outlook survey
expect input cost pressures to soften on account of lower raw material
costs in Q2.
 As of 8 August 2019, the key indicators are:

Indicator Current rate

Inflation 2.86%

MSF(Marginal Standing Facility) Rate 5.65%

CRR 4%

SLR 18.75%

Bank rate 5.65%

5.15%
Reverse Repo Rate

Repo Rate 5.40% [13]

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