Monetary Policy Of RBI.

How monetary policy effect the money supply and economy of the country????.......
Group Members: 1. Aachman 2. Augustine 3. Bharat 4. Ishan 5. Sadaf

INTRODUCTION..
Controls and regulate money supply Important affect on GDP,rate of inflation and growth Influences the business prospects and the availability of credit in economy Aggregate demand and aggregate supply is also controlled

Objectives of Monetary Policy..

1. balance of payments 2. price stability. 3. economic growth. 4. full employment.

Phases of Monetary Policy

1. Expansionary Monetary Policy 2. Restrictive Monetary Policy

Expansionary Monetary Policy..

RBI expands the money supply Encourage reduction in interest rates Expansion of credit Adopted when inflation rate is falling and investment activity is low

Restrictive Monetary Policy.

RBI restrict the money supply Curtail aggregate demand of goods and services Interest rates are increased Adopted to control inflation(1951-1991) Bank rate, CRR and SLR increased

Tools to Regulate Money Supply.

Bank Rate: Rate at which RBI lends to commercial banks Increases to restrict money supply Decreases to increase money supply From 1971 to 1998 remain between 9% to 12% Lowest at 6% in 2003 Current at 6%

Tools to Regulate Money Supply.

Cash Reserve Ratio(CRR):
Amount that every bank have to deposit with RBI as security Increases when need to restrict money supply Decreases when need to restrict money supply Highest in 1994 15% Current Rate 5.5%

Tools to Regulate Money Supply.

Statutory Liquidity Ratio(SLR):
Banks are required to keep part of their assets in govt. securities Increases to restrict money supply Decreases to increase money supply Ranges from 20 to 40 % Highest 38.5 % in 1990 Current - 24%

Tools to Regulate Money Supply.

Lending to Priority Sectors:
Some sectors such as agriculture, small and village industries and rural sectors are focused much Credit priority to these sectors has been encouraged by keeping lower margins, fixing ceiling interests rates and by fixing quota Even now, the quota is 40% For this purpose NABARD and SIDBI doing a great job

Tools to Regulate Money Supply.

Open Market Operations: Sales and purchase of Govt. securities RBI is using this tool in order to increase or decrease money supply Repo Rate: Rate at which RBI lends money to other banks Reverse Repo Rate:

Rate at which RBI takes deposits from other banks

CURRENT CLUTCHES
RBI has increased Repo Rate under its Credit Policy to 7.25% from 6.75% Savings bank deposit interest rate is increased to 4% from present 3.5% with immediate effect. RBI introduces a new mechanism by instituting a new Marginal Standing Facility (MSF), rate of interest is 8.25%

Cut off in CRR by 0.5%

Relationship between inflation and unemployment

Current News
Banks are likely to reduce lending rates for select sectors and may see an improvement in their net interest margins after the RBI cut cash reserve requirements for banks Headline inflation does not need to get to a particular number for the Reserve Bank of India to act on interest rates, Deputy Governor Subir Gokarn said. The RBI as expected left its policy repo rate unchanged at 8.50 percent for the second consecutive review, but lowered the CRR to 5.50 percent from 6.00 percent.

Current News.
As a result of the reduction in the CRR, around 320 billion rupees of primary liquidity will be injected into the banking system. Retains FY12 money supply growth projection at 15.5 percent. inflation may show some moderation Maintain an interest rate environment to contain inflation and anchor inflation expectations