Monetary Policy. MONETARY POLICY Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting.

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Presentation transcript:

Monetary Policy

MONETARY POLICY Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) The supply of money, (ii) Availability of money, (iii) Cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy

Measures of Money Stock M1 - Currency with public + Demand Deposits with banks + Other deposits with RBI. M2 - M1 + Post office savings deposits M3 - M2 + Time Deposits with Banks (F.D’s) M4 – M3 + Total Post Office Deposits

Types of control :

GENERAL Bank Rate Open Market Operations Change in Liquidity Ratio (SLR) Change in Minimum Reserve Ratio (CRR) Repo (Repurchase) Rate Reverse Repo Rate SELECTIVE Change in marginal Requirements Rationing of Credit Moral Suasion Direct Action

Fiscal Policy Use of “Government Expenditure”, and “taxation” to manage the economy. Fiscal Policy operates through Budget. The Budget simply means the estimate of revenue and expenditure Fiscal Policy operates through Budget. The Budget simply means the estimate of revenue and expenditure Purpose of Fiscal Policy Accelerate the rate of investment, rapid economic development, Full Employment, promoting Foreign Trade, Reducing inequalities of Income Purpose of Fiscal Policy Accelerate the rate of investment, rapid economic development, Full Employment, promoting Foreign Trade, Reducing inequalities of Income