• According to Prof. Harry Johnson,• "A policy employing the central banks control of the supply of money as an instrument for achieving

the objectives of general economic policy is a monetary policy."•

According to A.G. Hart,

• "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."

From both these definitions, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives. The Central Bank of a nation keeps control on the supply of money to attain the objectives of its monetary policy.

• Objectives of Monetary Policy :-

The objectives of monetary policy differ from country to country according to their economic conditions. In the less developing countries like India or Pakistan its objective may be the maintenance of monetary stability and help in the process of economic development. In the developed countries its objective may be to achieve full employment, without inflation. Anyhow following are the main objectives of the monetary policy.

1. Control of Inflation and Deflation :-Inflation and deflation both are not suitable for the economy. If the price level is reasonable and there is an adjustment between the price and cost, rate of out put can increase. Monetary policy is used to coordinate the cost and price. So price stability is achieved through the monetary policy.

2. Exchange Stability :-Monetary policy second objective is to achieve the stable foreign exchange rate. If the rate of exchange is stable it shows that economic condition of the country is stable.

3. Economic Development :-Monetary policy plays very effective role in promoting economic growth by providing adequate credit to productive sectors.

4. Increase in the Rate of Employment :-Monetary policy another objective is to achieve full employment but without inflation.

5. Equal Distribution of Credit :-Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should be given to backward areas.

6. Improvement in Standard of Living :-It is also the major objective of the monetary policy that it should improve the quality of life in the country.

ELEMENTS OF MONETARY POLICY

Qualitative Measures Quantitative Measures

Bank rate Open market operations Cash reserve ratio (CRR) Statutory liquidity ratio (SLR)

Quantitative measures

Ω Rationing of creditΩ Moral SuasionΩ Direct ActionΩ Regulation in consumer creditΩ Changes in margin requirements

Qualitative Measures

Quantitative credit control • Bank rate

Bank rate is the rate, which the central bank charges for giving loans and accommodation to the commercial banks.

• Open market operations

Deliberate purchase and sale of government securities in the money market by the central bank, with the objective of expansion or contraction of credit and general economic activity

Quantitative credit control

• Reserve requirements In view of safety and liquidity, the commercial banks are legally required to keep a part of their total demand and time deposit as reserve. By raising the reserve ratio to be maintained by every bank, the central bank can reduce the volume of credit Cash reserve ratio: Minimum cash reserve which the banks are required to keep with the central bankStatutory liquidity ratio: Minimum amount of liquidity, which the banks are required to keep with them

Qualitative credit control

• Margin requirementThe central bank can order the commercial banks to lend an amount lower than the volume of a security. A higher margin used during inflationary situation will reduce the amount of loan given by the banks.

• Rationing of creditCredit rationing is a method of controlling and regulating the purpose for which the banks grant credit

• Regulation of consumer creditThe central bank can regulate the terms and conditions under which consumer credit is to be given by the banks

Qualitative credit control

• Differential rate of interestUnder this scheme the central bank fixes up different rates on interest to be charged by the banks from different borrowers who borrow for different purposes

• Moral suasionIt implies persuasion and request made by the central bank to commercial banks to follow the general policy of central bank

• Direct actionDirect action refers to all the controls and directions, which the central bank may enforce on all banks or any bank in particular concerning lending and investment

• CRR-• By increasing the CRR, the RBI decreases the lending capacity of

the bank to the extent of the increase in the ratio.• E.g of the CRR is increased from 7.5% to 8.5% the banks were

deprived of lending to the extent of 75 basis points of their

deposit value.

Increase OR Decrease the lending Rates

• The RBI makes an adjustment in its lending rate(Repo Rates) in order to influence the cost of credit. Thereby discouraging borrowing and hence reduces brings reduction in the system.

Obstacles In Implementation of Monetary Policy

• Through the monetary policy is useful in attaining many goals of economic policy, it is not free from certain limitations

LIMITATIONS • Time Lag Affects Success of Monetary Policy- The success of the monetary policy

depends on timely implementation of it. However, in many cases unnecessary delay is found in implementation of the monetary policy. Or many times timely directives are not issued by the central bank, then the impact of the monetary policy is wiped out.

• Existence of Unorganized Financial Markets- The financial markets help in implementing the monetary policy. In many developing countries the financial markets especially the money markets are of an unorganized nature and in backward conditions. In many places people like money lenders, traders, and businessman actively take part in money lending. But unfortunately they do not come under the purview of a monetary policy and creates hurdle in the success of a monetary policy.

• There exist a Non-Monetized Sector-In many developing countries, there is an existence of non-monetized economy in large extent. People live in rural areas where many of the transactions are of the barter type and not monetary type. Similarly, due to non-monetized sector the progress of commercial banks is not up to the mark. This creates a major bottleneck in the implementation of the monetary policy

•5.11%Inflation•8.75%Bank Rate•4.00%CRR•21.50%SLR•7.75% Repo Rate•6.75%Reverse Repo Rate

Current Rates