1. Monetary Policy

2. Macroeconomic Policies (Economic Stabilization Policies)
Stabilization policies are policies by the government to maintain full employment and reasonably stable price level
The objectives of the macroeconomic policies are mainly two:
Sustain economic growth (maintain full employment)
Control inflation (stabilize general price level)
Types of Macroeconomic Policies
Fiscal Policies
Monetary Policies

3. Monetary Policy
How does a monetary authority decide on when to expand or contract credit and by how much?
Decision based on the overall objectives of the monetary policy

4. Meaning of Monetary Policy
“Monetary policy is essentially a programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals”
The objectives of monetary policy are the same as of macroeconomic policy – price stability, currency stability, financial stability, growth in employment and income

5. Monetary Policy and Money Supply
The money supply is controlled by the RBI through:
Changing the reserve requirements
Changing the policy rates (bank rate, repo rate and reverse repo rate)
Open-market operations
Thus the quantity of money supplied does not depend on the interest rate and is vertical

6. Instruments of Monetary Policy
Credit Control by the Central Bank
Instruments of credit control
Broadly categorized into two:
General instruments are intended to regulate the total volume of credit (quantitative)
Include (1) Bank rates, (2) open market operations,
(3) power to vary the reserve requirements
Selective instruments to regulate the purpose for which commercial banks generated credit (qualitative)

7. Variable Reserve Ratios
Banks are required to maintain a percentage of their deposits in the form of balances with the RBI, known as legal reserve requirement (statutory reserve requirement)
RBI has the power to vary this ratio and used as an instrument of credit control
An increase in reserve requirement ratio will reduce the reserves for lending by the banks
A lowering of the reserve ratio will enable the banks to expand credit
The most easiest way to control credit

8. Bank Rate
The minimum rate at which the central bank of a country provided financial assistance to commercial banks
By raising or lowering bank rate, the central bank can reduce or expand credit granted by banks
Currently bank rate in India is 6.5%

9. Bank Rate How bank rate works?
↑ bank rate → ↑ cost of borrowing by commercial banks from the central bank → ↑ in lending rate of commercial banks → less borrowing
Adverse effect on the level of production and prices
Usually used during inflationary situation
Similarly, a fall in bank rate lower the lending rates of CBs and lead to expansion of bank credit and may raise income and output

10. Conditions for successful working of bank rate
A well organized money market in order to have impact on other rates in the market
Reactions of borrowers to change in the lending rates
A fall in output may coexist with a rise in price
Customers’ assessment of the economic situation. If the business conditions are not favorable lowering of lending rate may not attract much borrowers

11. Policy Rates (www.rbi.org.in, 08/2017)
Repo rate
6 %
Reverse repo rate
5.75 %
Repo (from the perspective of the seller of a security) or Reverse repo (from the perspective of the buyer of a security) is a Repurchase agreement in which two parties agree to sell and repurchase a security on an agreed date at a predetermined price.
When banks sell securities, repo rate is applicable; when banks buy securities to park surplus funds, reverse repo rate is applicable.

12. Reserve Ratios (www.rbi.org.in, 27/01/2012)
Cash Reserve ratio
4 %
Statutory Liquidity ratio
20 %

13. Marginal Standing Facility (MSF):
Instituted under which scheduled commercial banks can borrow over night at their discretion up to one percent of their respective NDTL at 100 basis points above the repo rate to provide a safety valve against unanticipated liquidity shocks 

14. Market Stabilization Scheme (MSS):
Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills.
The mobilized cash is held in a separate government account with the Reserve Bank.

15. Open Market Operations
Primary instrument of credit control in developed markets
Involve the purchase and sale of securities by the central bank
The purchase of securities by a central bank leads to an increase in the bank reserves
This leads to a multiple expansion of credit and deposits
On the other hand sale of securities by the central bank will reduce bank reserves and lead to multiple contraction of credit
This is not used as an instrument of credit control in India, because this market is very narrow in India

16. Selective Credit Controls
Purpose is to regulate the flow of credit for financing specific activities
RBI encourages the flow of credit to agriculture and to other sectors like export
For borrowings of CBs to refinance such operations RBI charges a lower interest rate than the bank rate
The ultimate objective is to prevent a rise in the price of these commodities with the help of bank credit
Selective credit controls have been operation in India against commodities like foodgrains, oilseeds, cotton, etc.

17. The Effects of Money on Output and Prices
Transmission Mechanism of Monetary Policy
Suppose RBI is concerned about inflation and has decided to slow down the economy
Step 1: Suppose RBI reduces reserves with the banks through any of its credit control activity
Step 2: Reduction in bank reserves result in a multiple contraction in deposit or credit creation, thereby reducing the money supply

18. The Effects of Money on Output and Prices
Step 3: Reduction in money supply increases interest rates and tightens credit conditions, and lowers the value of people’s assets
Step 4: With higher interest rates and lower wealth, investment falls. It may raise the exchange rate of the currency, depressing net exports
Step 5: Tight money leads to reduced aggregate demand, reduces income, output, jobs and inflation

19. In short……
In a fully employed economy, the higher money supply would be chasing the same amount of output and would therefore mainly end up raising prices
That is, in the long run, prices and wages are more flexible, and money supply changes tend to have a larger impact on prices and a smaller impact on output

20. Videos
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reviews-RBI-monetary- policy/videoshow/ cms
coordinate-monetary-and-fiscal-policy-D- Subbarao/videoshow/ cms

21. Thank You