MONETARY POLICY
MEASURES
&
CENTRAL BANK
How does the Central Bank control
Money Supply or Flow of Credit in
the Economy?
Monetary Policy – the Policy
which is related with the Money
supply and credit availability of
the Economy.
- Quantitative instruments
- Qualitative instruments
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)
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
BANK RATE: Rate at which the central bank
is lending to the commercial banks.
INFLATION
CENTRAL
BANK
Money SS
falls
BANK
RATE
COMMERCIAL
BANK
MKT.
RATE
OF INT.
Credit
contracts
DEFLATION
CENTRAL
BANK
Money SS
RISES
COMMERCIAL
BANK
BANK
RATE
MKT.
RATE
OF
INT.
Credit
EXPANDS
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.
CASH RESERVE RATIO
• It refers to the minimum percentage of a
bank’s 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.
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.
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.
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.
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.
DIRECT ACTION:
The central bank may initiate direct
action against member banks in
case these do no comply with its
directives.
Direct action includes derecognition of a commercial bank as
a member of the country’s banking
system.
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.
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.
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.
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.