Apna Sapna Money-MoneyApna Sapna Money-Money

RBIRBI

Monetary Policy and Monetary Policy and National IncomeNational Income

By-By-

Rahul Jain Rahul Jain

InflationInflation

In economics, inflation is an increase in the In economics, inflation is an increase in the general level of prices of a given kind. General general level of prices of a given kind. General inflation is referred to as a rise in the general inflation is referred to as a rise in the general level of prices. level of prices.

Measuring InflationMeasuring Inflation

Use of price index system for measuring Use of price index system for measuring inflation. inflation. For example, The Consumer Price Index (CPI) For example, The Consumer Price Index (CPI) is a measure of the average change over time is a measure of the average change over time in the prices paid by urban consumers for a in the prices paid by urban consumers for a market basket of consumer goods and services market basket of consumer goods and services

Monetary PolicyMonetary Policy

The term "monetary policy" refers to the actions The term "monetary policy" refers to the actions undertaken by a central bank, such as the RBI, undertaken by a central bank, such as the RBI, to influence the availability and cost of money to influence the availability and cost of money and credit to help promote national economic and credit to help promote national economic goals.goals.

Tools of monetary policyTools of monetary policy

Thus the three ways in which the federal Thus the three ways in which the federal reserve can change the money supply are reserve can change the money supply are 1. Change in Bank Rate 1. Change in Bank Rate 2. Open Market operations like buying and 2. Open Market operations like buying and purchasing of government securities purchasing of government securities 3. Change in Cash reserve ratio and SLR3. Change in Cash reserve ratio and SLR

SLR REQUIREMENTSSLR REQUIREMENTS

Banks, NBFCs, and HFIs are required to invest in Banks, NBFCs, and HFIs are required to invest in government securities and other approved debt government securities and other approved debt instruments and securities to comply with the instruments and securities to comply with the SLR requirements of the RBI. SLR requirements of the RBI.

The SLR, which is the minimum level of The SLR, which is the minimum level of investment in approved securities, computed daily, investment in approved securities, computed daily, is a percentage of the outstanding net demand and is a percentage of the outstanding net demand and time liabilities (NDTL) of banks.time liabilities (NDTL) of banks.

For NBFCs and HFIs, SLR is a percentage of their For NBFCs and HFIs, SLR is a percentage of their outstanding public deposits.outstanding public deposits.

Increase in Money SupplyIncrease in Money Supply

1. Reduction in bank rate,  specific interest rate 1. Reduction in bank rate,  specific interest rate on loans and savings on loans and savings 2. Buying  of government securities from bank 2. Buying  of government securities from bank to increase the money supply to increase the money supply 3. Reduction in the variable reserve ratios like 3. Reduction in the variable reserve ratios like statutory liquidity ratio and cash reserve ratio. statutory liquidity ratio and cash reserve ratio.

(Mishra & Puri)(Mishra & Puri)

Reduction in Money SupplyReduction in Money Supply

1. Rise in bank rate, specific interest rate on 1. Rise in bank rate, specific interest rate on loans and savings loans and savings

2. Selling of government securities to bank to 2. Selling of government securities to bank to curb inflation and to contract the money curb inflation and to contract the money supply supply

3. Increase in the variable reserve ratios like 3. Increase in the variable reserve ratios like statutory liquidity ratio and cash reserve ratio. statutory liquidity ratio and cash reserve ratio.

RBIRBIEstablishmentEstablishment

•The Reserve Bank of India was established on The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.of the Reserve Bank of India Act, 1934.•The Central Office of the Reserve Bank was The Central Office of the Reserve Bank was initially established in Calcutta but was initially established in Calcutta but was permanently moved to Mumbai in 1937. The permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and Central Office is where the Governor sits and where policies are formulated.where policies are formulated.•Though originally privately owned, since Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully nationalization in 1949, the Reserve Bank is fully owned by the Government of India.owned by the Government of India.

PreamblePreamble

"...to regulate the issue of Bank Notes and keeping "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary of reserves with a view to securing monetary stability in India and generally to operate the stability in India and generally to operate the currency and credit system of the country to its currency and credit system of the country to its advantage." advantage."

Main objectivesMain objectives

1. Monetary authority1. Monetary authority Formulates, implements and monitors the Formulates, implements and monitors the

Monetary Policy, announced twice a year. Monetary Policy, announced twice a year. Announces the Credit Policy, announced Announces the Credit Policy, announced

twice a year - in April it announces new twice a year - in April it announces new policy initiatives, the October pronouncement policy initiatives, the October pronouncement is a review of the April policy. is a review of the April policy.

Objective: Maintaining price stability and Objective: Maintaining price stability and ensuring adequate flow of credit to ensuring adequate flow of credit to productive sectors. productive sectors.

Maintain optimum Liquidity in the economy. Maintain optimum Liquidity in the economy.

ReferencesReferences

www.bls.gov www.bls.gov Mishra & Puri , MACRO ECONOMICS. Mishra & Puri , MACRO ECONOMICS.

Sultan Chand & Sons Sultan Chand & Sons www.americanchronicle.com/articles/www.americanchronicle.com/articles/

viewArticle.aspviewArticle.asp www.economics.about.comwww.economics.about.com