DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name Staff Member : P. BADARINARAYANA
Designation : Sr. Lecturer
Branch : DCCP
Institute : Govt. Polytechnic, NELLORE
Year/Semester : VI Semester
Subject : BANKING II
Sub. Code : CCP-604(B)
Topic : Reserve Bank of India
Duration : 50 Mts.
Sub Topic : Monetary Policy of RBI
Teaching Aids : Animations
CCP604(B)54 1
Objective :

On completion of this period, you would be

able to
 Comprehend the Monetary Policy of Reserve
Bank of India.

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Recap

In the last lesson we have seen

 The Qualitative Controls of Reserve Bank of
India.
 Today we will see the Monetary Policy of
Reserve Bank of India.

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Monetary Policy of Reserve Bank:

 The Reserve Bank of India has assumed a much

significant role of developing the economy with the
ultimate aim of raising the standard of living of the
poverty-stricken masses
 For this, the over all policy approach of the RBI had
been to expand banking facilities in rural and semi-
urban areas and reducing inter-regional disparities
in this regard

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Monetary Policy of Reserve Bank…

 Top priority being given to ensure the presence of

bank branches in all the community development
block head quarters in the country

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Monetary Policy of Reserve Bank…

 The banking system in India is gaining strength

and effectiveness day by day as a result of a
series of measures taken by the Reserve Bank,
such as
 Consistently following a supervised branch
expansion program
 Setting up of specialised financial institutions to
cater to the growing needs of the economy
 Orienting flow of credit to plan priorities, etc.
CCP604(B)54 6
Monetary Policy of Reserve Bank…

 The Reserve Bank of India has helped in setting

up of
 The Industrial Finance Corporation of India
 The State Financial Corporations
 Regional Rural Banks and Exim Bank.
 It set up the Deposit Insurance and Credit
Guarantee Corporation in 1962
 The Unit Trust of India in 1964
 The Industrial Development Bank of India, etc.
CCP604(B)54 7
Monetary Policy of Reserve Bank…

 This enlargement of the financial structure is an

indication of the functional specialisation in
banking, necessary for catering to the
requirements of a growing economy and the vital
contribution made by the Reserve Bank in this
direction.

 With this Monetary Policy the RBI is helping the

country to develop in all fields.

CCP604(B)54 8
Objectives of Monetary Policy

The policy followed by a central bank to control

credit is known as monetary policy or central bank
policy.
Raymond P. Kent defines monetary policy as
 “The management of the expansion and
contraction of the volume of money in circulation
for the explicit purpose of attaining a specific
objective such as full employment”

CCP604(B)54 9
Objectives of Monetary Policy…
Though there is differences of opinion as regards
the objectives of monetary policy. The following
are considered as the main objectives of
Monetary Policy.
1. Neutral Money
2. Exchange rate stability
3. Stability of prices & removal of business
cycles
5. Full employment
6. Economic growth
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1. Neutral money as objective of
monetary policy

 Money should be a passive factor having only one

function i.e to be a medium of exchange
 It should not inject any disturbance or element of
distraction76
 i.e It should be neutral in its effects

CCP604(B)54 11
2. Stable Exchange Rate

 Exchange rate was considered an essential

condition for promotion of smooth International
trade leads to maximisation of welfare
 Fluctuations in exchange rate might lead to lack of
confidence in a particular currency

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2. Stable Exchange Rate…

 Fluctuations in exchange rate might lead to

unpleasant effects
 Speculation in the foreign exchange market
 International lending and Investment would
be seriously affected
 Thus stable exchange rate is a worthwhile
objective of monetary policy

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3. Stabilization of price level and
control of trade cycles

 Price stability creates difficult problems of

production and distribution
 If prices are falling, there is widespread failure of
business units and results unemployment
 Contrary to this rising prices shifts distribution of
wealth from poor to rich.

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4. Full employment

 Correct the deficiency of demand ( in case of

recession)
 Prevent excess demand over the available supply
( in case of inflation)
 To maintain full employment

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5. Economic growth
The real growth can be promoted by securing
carefully
c. Efficient payment mechanism
d. Adequate money supply
e. Help in the expansion of financial system
f. Creation of new financial institutions
g. Solve the problems of balance of payment
It is the important objective of monetary policy in
an underdeveloped economy.
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Summary :

Today we have discussed the Monetary

Policy of Reserve Bank of India.
 The objectives of monetary policy

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Frequently Asked Questions

1. Explain the Monetary Policy of Reserve Bank of

India.
2. Explain the objectives of monetary policy

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