Monetary Policy

• Monetary policy refers to the use of instruments within the control of

central bank to influence the level of aggregate demand for goods and
services or to influence the trends in certain sector of the economy.

Measurement of money stock:

• R B I Employs four measurement of money stock namely M1,M2,M3,M4

• M1= currency with the public, demand deposit with bank and other deposit
with RBI

• M2=M1+ post office saving bank deposit

• M3=M2+time deposit with banks

• M4=M3+ total post office deposits

-Monetary policy operates through varying cost and availability of credit.

-Modern economy is regarded as a credit economy.

-Capacity of banks to provide credit depends on their cash reserves, a portion of

the reserves held in the form of balances with the Reserve bank. Banks can
expand their reserves by raising the deposit resources of the bank or by
borrowing from the Reserve bank.

-Instruments of monetary policy are divided into:

 General (Quantitative) methods

 Selective (Qualitative) methods
The general methods affect the quantity of credit and affect the economy
generally. Quantitative instrument of credit control,

 The bank rate

 Open market operations
 Variable reserve requirements

The Bank rate:

Discount rate

Pace-setter

Increase in bank rate increases cost of credit and reduce the extent borrowings

Open market operations:

Purchase and sale by central bank of a variety of assets (foreign exchange, gold,
government securities and company shares) but in India only government
securities

Variable reserve requirements:

Every commercial bank maintain certain percentage of their deposits in central

bank

Central bank has power to vary this and variation in this affect the credit creating
capacity of commercial banks. (Current 6%)

Statutory Liquidity ratio:

Maintain minimum amount of liquid assets/need to have threshold limit of assets

which is not less than specified demand (Current 24%).

The aim of Selective credit control is to discourage such forms of activity which
are considered to be inessential or less desirable.
In India, such controls have been used to prevent speculative hoardings of
commodities to check an under rise in their prices.

• Selective method affect the selected sector

• The aim of selective control is to discourage such form of activity as are

considered to be relatively inessential raw material to check an undue rise
in their price

• The margin to be maintain in respect of secure advances

• The maximum amount of advances or other financial accommodation

which, having regard to the paid up capital, reserve and deposit of a
banking company and other relevant consideration, may be made by a
banking company to any one company, firm, etc.