description of Monetary policy

1. Presentation
• On
MONETARY POLICY
By:- NIPUN NIKUNJ

2. OVERVIEW
• Introduction
• Characteristics
• Aim
• objective
• Major Players
• Types
• Operations of monitory policy
• RBI annual policy statement 13

3. Presentation
On
MONETARY POLICY
By:
NIPUN NIKUNJ

4. What is Monetary Policy
• The term monetary policy refers to actions taken by central
banks to affect monetary magnitudes or other financial
conditions
• Attempts to influence the level of economic activity through
changes to the amount of money in circulation and the price
of money – short-term interest rates
• The money supply can/does influence price levels
Inflation occurs if the money supply increases, ceteris paribus.
Deflation occurs if the money supply decreases, ceteris paribus.

5. Continue….
• Interest rates the key area of Monetary Policy
• Basis of Monetary Policy is that there is a long run
relationship between the amount of money and
inflation
Main circumstances:-
(i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of interest to attain a
set of objectives oriented towards the growth
and stability of the economy.

6. Aims of Monetary policy
• MP is a part of general economic policy of the
government
• Thus MP contributes to the achievement of
the goals of economic policy
• MP also fulfill following aims also:-
Full employment
Stable exchange rate
Economic growth
Reasonable Price Stability
Greater equality in distribution of income & wealth
Financial stability

7. OBJECTIVES OF MONETARY POLICY
 Price stability
 Credit availability
 Stability of exchange rate
 Full employment
 High rate of economics growth
 Distribution of money

8. Price Stability: The Dominant Objective
• There is convergence of views in developed and
developing economies, that price stability is the
dominant objective of monetary policy.
• Price stability does not mean complete year-to-
year price stability which is difficult to attain.
• Price stability refers to the long run average
stability of prices.
• Price stability involves avoidance of both
inflationary and deflationary pressures.

9. Continue…
• Price Stability contributes improvements in the
standard of living of people.
• It promotes saving in the economy while
discouraging unproductive investment.
• Price stability leads to interest rate stability, and
exchange rate stability (via export import stability).
• It contributes to the overall financial stability of
the economy.

10. Major players
Reserve Bank
presidents
Federal Open Market
Committee(FOMC)
Direct open market operations
Chair of the Board Advises on discount rate and
Board of Governors of Governors
Approves discount reserve requirements
rates
set reserve
requirement 6 Governors of the
Directs regulatory Board
operations

11. Types of monetary policy
The distinction between the various types of monetary policy lies primarily with
the set of instruments and target variables that are used by the monetary
authority to achieve their goals
Monetary Policy: Target Market Variable: Long Term Objective:
Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI
Price Level Targeting Interest rate on overnight debt A specific CPI number
Monetary Aggregates The growth in money supply A given rate of change in the CPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Low inflation as measured by
Gold Standard The spot price of gold
the gold price
Usually unemployment + CPI
Mixed Policy Usually interest rates
change

12. Instruments of Monetary Policy
• Variations in Reserve Ratios
• Discount Rate (Bank Rate)
(also called rediscount rate)
• Open Market Operations (OMOs)
• Other Instruments

13. RBI Annual Policy Statement
The Statement consists of two parts:
Part I. Annual Statement on Monetary Policy
for the Year 2012-13; and
Part II. Annual Statement on Developmental
and Regulatory Policies for the Year 2012-13
• First Quarter Review in July
• Mid-term Review in October,
• Third Quarter Review in January

14. Monetary policy Consists:-
• The State of The Economy
Global Economy
Domestic economy
Inflation
Monetary Aggregates

15. Monetary Measures
Repo Rate under LAF- 7.75% (Decreased from
8.00%)
Cash Reserve Ratio (CRR)- 4.00%(Decreased from
4.25%)
Bank Rate- 8.75%(decrease from 9.0- previous
quater)
Statutory Liquidity Ratio (SLR)- 23%
Reverse Repo Rate under LAF-
6.75%(Decreased from 7.00%)