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MONETARY POLICY MEASURES& CENTRAL BANKHow 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)


Margin requirements Rationing of Credit Moral Suasion Direct Action 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.


BANK RATE: Rate at which the central bank is lending to the commercial banks.CENTRAL BANKINFLATIONBANK RATECOMMERCIAL BANKMKT. RATE OF INT.Credit contractsMoney SS falls




OPEN MARKET OPERATIONSREFER 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 RATIOIt 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 INSTRUMENTSMARGIN 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 de-recognition 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.

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Last Updated: 8th March 2018