Monetary Policies of India, Monetary Policy instruments/Tools, Objectives of Monetary policy of RBI Quatitative and Qualitative Control measure

Monetary Policies of India, Monitary Policy instruments/Tools, Objectives of Monetary policy of RBI, Quatitative and Qualitative Control measure, What is CRR, What is SLR, What is REPO, What is reverse Repo, Difference between repo and reverse repo, Credit rationing etc.

Monetory Policy: This policy affects the growth of money supply in the economy by changing the cost of credit. It is controlled by Central Bank of India i.e RBI.

Click Here to Download it in PDF

It is of two types:

  I.        Expansionary or Cheap money Policy: It increases money supply by making credit cheaply available.

II.        Contractionary Money Supply: It decreses money supply by making credit expensive.

Monetary policy / monetary management:

It is regarded as an important tool of economic management in India. To push up growth this policy determines the amount of money and credit that will be available to various sector of the economy, whether it is High scale Sector or Small scale Sector. While adopting this policy, it has also to keep in mind that money supply does not exceed the genuine demands of various sectors and lead to inflation.

To strike a balance between the two objectives of pushing growth on the one hand and control inflation on the other, RBI has followed a policy of CONTROLLED EXPANSION that means money supply is expanded to meet only the genuine requirement of various sector taking a caution that it does not leads to inflation.

Objectives of Monetary Policy in INDIA:

1.    Growth With Stability :

Traditionally, RBI’s monetary policy was focused on controlling inflation through contraction of money supply and credit. This resulted in poor growth performance. Thus, RBI has now adopted the policy of ‘Growth with Stability’ as earlier discussed. This means sufficient credit will be available for growing needs of different sectors of economy and at the same time, inflation will be controlled.

2.     Promoting Priority Sector :

 To promote the sector that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and Micro and Small enterprises, RBI have put all these sectors under priority sector. RBI with the help of bank provides timely and adequately credit at affordable cost of weaker sections and low income groups. RBI, along with NABARD, is focusing on microfinance through the promotion of Self Help groups and other institutions.

3.    Generation Of Employment :

Monetary policy helps in employment generation by influencing the rate of investment and allocation of investment among various economic activities of different labour Intensities. Encourage people to become entrepreneur  which also play a role to generate employment.

4.    Encouraging Savings And Investments :

RBI by offering attractive interest rates encourage savings in the economy. A high rate of saving promotes investment. Thus the monetary management by influencing rates of interest can influence saving mobilization in the country. By encouraging savings Bank can get Capital which it can lend to different sectors for the productive purposes and help to boost up economic growth.

5.    Equal Income Distribution :

Apart from Fiscal policy, Monetary policy also plays a important role in maintaining economic equality. By making credit available at an affordable cost to sectors which impact the large sections, weaker sections such as agriculture, small-scale industries, village industries, etc. , monetary policy can help in reducing economic inequalities among different sections of society.

6.    Regulation, Supervision And Development Of Financial Stability :

Financial stability means the ability of the economy to absorb unexpected losses and maintain confidence in financial system. These losses can destabilize the country’s financial system. Thus, greater importance is being given to RBI’s role in maintaining confidence in financial system through proper regulation and controls, without sacrificing the objective of growth.

RBI Monetary Policy / Monetary policy Instruments or Tools/ Monetary management of RBI / RBI Credit Control Measure:

The Monetary Policy of RBI is not merely one of credit restriction, but it has also the duty to see that legitimate credit requirements are met and at the same time credit is not used for unproductive and speculative purposes.

Principal measures of credit control are:

1.    General or Quantitative Credit Control measure: These controls are designed to regulate the overall volume of credit created i.e. loan given by commercial banks.

Principal instruments to achieve the general credit control:

a.    Bank Rate: It is that rate of interest at which the RBI provides refinancing facilities to commercial banks by rediscounting their bill of exchanges or other commercial papers. In simple words, Bank rate is the rate at which the Central bank lends money to the commercial banks for their liquidity requirements. Bank rate is not an interest rate, rather it is a discount rate. RBI changes this rate time to time. Any change in the bank rate necessarily brings out a resultant change in the cost of credit available to commercial banks. RBI generally raise the bank rate during inflation and lower it during slowdown. Do not confuse bank rate with the interest rate of Bank accounts like Saving account, Fixed deposit.

b.    Cash Reserve Ratio(CRR) / Variable Reserve Ratio: The RBI act, 1934 stipulates that a commercial bank is required to keep a certain percentage of its total deposits with the RBI in cash. For example, if you deposit Rs 100 in your bank, then bank can't use the entire Rs 100 for lending or investment purpose. They have to maintain a certain percentage of their deposits in the form of cash and can use only the remaining amount for lending/investment. RBI uses this tool to curb inflation and to control excessive liquidity in the market. When the ratio is raised it is called a policy of credit squeeze and when it is lowered it is called credit liberalization.

 

c.    Statutory Liquidity Ratio: Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of their net demand and time liabilities with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.

d.    Open Market Operations:  These operations are used to buy and sell government securities in open market in order to inject or absorb the amount of money in the banking system. Purchases of government securities inject money into the banking system while sale of securities absorb surplus liquidity.

e.    REPO and Reverse REPO:

 * REPO: REPO means repurchase options which are exercised by RBI since 1992. Under this RBI repurchase government securities lying with banks. It is used for short term i.e overnight, 1day, 7 days and 14 days. RBI sell government securities to commercial bank with a promise to repurchase them. Repo rate is the rate at which Central bank lends short term money to the banks against government securities. It is not an interest rate, rather it is a discount rate. Repo means injection of liquidity in the banking system. When repo rate increases borrowing from RBI becomes more expensive.

 * Reverse Repo: It means banks buy securities from RBI for a short period. So reverse repo rate is the rate at which bank lend to RBI for a short period of time against securities. It results in absorption of liquidity from the banking system.

2.    Qualitative or Selective Credit Control measure: These are designed to regulate not only the volume of credit but also for the purpose for which loans are given by commercial banks.

Principal instruments under this control measure are:

a.    Credit Rationing: RBI directs Commercial banks to give loan to different sectors of the economy in accordance with the priority of different sectors.

b.    Regulation of Consumer Credit: Central Bank directs commercial banks, particularly during inflation to restrict loans given for TV, cars, Motorbikes etc.

c.    Variation of Margin Requirements: Margin means that proportion of the value of security against which loan is not given. Margin against a particular security is reduced or increased in order to encourage or discourage the flow of credit to a particular sector. For example: if RBI finds that loan given by banks are used by some traders to buy and hoard some essential goods say sugar, then RBI directs banks to increase the margin against such loans.

d.    Moral Suasion: RBI persuades the commercial banks to follow its directives/order on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal during deflation.

e.    Direct Action: When moral suasion proves ineffective then RBI may use direct action on banks. It may involve cancellation of license, not permitting opening of new branches etc.

Click Here to read or Download more Banking related Topics in Detail (Study Materials for PO,Clerk)

You might also like: 

If you want to Download Papers of other examinatins like SSC CGL, SSC Multitasking, SSC10+2, SSC Stenographer, IBPS PO,IBPS Clerk,  Insurance Paper, Bank Various Papers, Intelligence Bureau Papers, IES, GATE and Many more then Click Here

 

Thanks to visit the site.

 How to Download : Click on the Download Link - new window will open - wait for 5 sec. &    click (skip button) at the top right corner as shown.     You Will 

 reach download Page.