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149, , ry Policy, , Monetar, , MONETARY POLICY:, Monetary policy is concerned with money supply, credit, , éion by banks and rate of interest. It is formulated and, nlemented by the Central bank. In India, for e.g the Reserve, of India is mainly responsible for implementing the, , C, , r, , e, , a, , t, , i, , o, , lemented, , Bank, , ary ppolicy. Tll the Great Depression of 1930's, this policy, onetary, , a, , mainly used to ensure economic stability. By controlling, money su, supply and credit creation, stability was ensured in the, Was, , However, during the 1930's monetary policy was not, effective in brining about a recovery. It lost its predominant, and, position to fiscal policy. At present a combination of fiscal, macro, monetary policies is used to achieve the objectives of, economic policy., , conomy., , Monetary policy is pursued by modern governments to, , achieve, , certain specific objectives. The objectives differ from country to, of, country and from time to time. It depends upon the stage, development and the economic situation in the economy during a, particular period of time. However,. the main objectives of, monetary policy are:, , (a) Accelerating economic growth., , (b) Maintaining price stability., c) Attaining full employment and maintaining it., , d) Ensuring stability in the rate of exchange., , Ihe objectives of, , follows:, , monetary policy, , can, , be, , analysed further, , as, , Economic Growth: Economic growth, refers to the increase in national income. To induce growth,, , Monetary Policy and, , capital formation should be high. Monetary policy promotes, capital formation by mobilising resources and making it, available to investors at the right time and at reasonable rate, of interest. The Central banks adopt a flexible policy to, , promote capital formation and economic growth. During, to control the supply, ntlation it adopts a dear money policy, a, it, o Credit and during depression adopts cheap money, , policy.

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Vipul'sM Business Economics -, , 150, , (b), , (SFC), Monetary Policy and Price Stability: Monetary, ain, ry policy, policy, controlling fluctuations in the price level as instabilityaims, in at, price level produces adverse effects on the economy. Vario the, measures are used by the central bank to control inflatio, or, mild inflation is better for the, a, running or galloping inflation is harmful for he econo, Similarly, it is necessary to control deflation by taking promni, action. Otherwise it will result in depression. While ensurino, , deflation. While, , (c), , econom, , a, , price stability, the government and the central bank should, ensure that growth is not affected and business, cycles are, controlled., When, actually, price stability is given importance, the government may have to, on the, compromise, objective of, full employment as, and, full, price stability, employment are, not compatible with each other., Monetary Policy and Full Employment: Full employment, refers to a situation where the, productive resources of the, , economy are fully employed. It also implies the absence of, , (d), , involuntary unemployment. It however, does not mean 100%, employment. When there is full employment in the economy,, a, higher level of income, output and improvement in, standard of living become, possible. This objective is given, importance by many advanced countries in recent, times., Monetary Policy and Exchange Rate Stability: Till 1970's,, exchange rate stability was emphasised by monetary, policy., Under the gold standard it was, given, , much, , importance., considered necessary to promote, international, trade and, control movement of capital between, nations. Some, are of, was, , It, , economists, the opinion that, exchange rate stability can, be attained only by, sacrificing internal price stability. At, , present this, , objective is considered secondary and, governments prefer flexible exchange rate policy somany, that, adjustments can be made as per the requirements of the, a, , economy., The Central bank tries to achieve these, objectives by using the, various tools of the monetary policy. The objectives are said, to be, , conflicting in nature. For e.g. price stability and full employment, do not go hand in hand with each other. If tull, , employment has, , to

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V"Y"V", , Monetary Policy, , be, , 151, , then more investments have to be made. This, will lead to more, employment, more income and more, , attained, , obviously, , demand for goods and services. If supply of goods and services, , does not match with the increase in demand, there will be, inflation in the economy. If price stability is more important, then, money supply and credit creation may be controlled leading to a, decline in investments. This will affect the level of employment., , Thus there exists a conflict between the various objectives of, , monetary, , policy., , However,, , if, , the Central bank, , and, , the, , government take appropriate measures to control inflation and at, the same time encourage investment, it is possible to achieve price, , stability and a higher level of employment, if not full employment., , Every economy, depending upon its stage of development and, economic compulsions gives priority to a particular objective., , While the advanced countries give importance to achieving and, maintaining full employment, developing countries like India, consider economic growth as the main objective of monetary, , policy., , lauments of Monetary Policy:, , The various instruments used by the Central bank can be, divided into two types namely:, (1) Quantitative Instruments, and, , (2) Qualitative Instruments., While the quantitative instruments help the Central bank to, control the quantity of credit, the qualitative weapons are used to, control the direction of credit., , (1), , Quantitative Instruments:, also called, , as, , the, , general, , The, , quantitative, , credit control is, credit control. The main, weapons, , used under this method are:, , (a) Bank Rate: It is the rate at which the Central bank, discounts the securities of comnmercial banks. It is also, called as the discount rate. Bank rate influences the cost, of credit changes in the discount rate, bring about changes, in the short term and long term interest rates and, thereby, the level of economic activity., Capital movement, between countries is also influenced by the, changes in

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Vipul'sM Business EConomics ll (SFC), 152, , both availability and cost o, bank rate. Thus, it influences, Central bank increases tho, credit. During inflation the, credit from the Central bant, bank rate. Due to this, , are, discouraged, costlier. Commercial banks, Central bank. When the bank, from borrowing from the, rates will also rise makino, other, , becomes, rate, , lending, , is increased,, , credit costlier. Hence,, , investments will decline, , leading to, , demand tor goods and, fall in employment, income and, the price level. Thus a, services. This in turn will reduce, in price level and, rise in bank rate leads to a reduction, reduced to push up, depression the bank rate is, , a, , during, , the price level and bring about a revival in the economy., commercial banks, For the bank rate to succeed, the, should not have excess reserves with them and they, , should have, , adequate, , securities to be discounted with, , the Central bank., (b) Open Market Operations: It refers to buying and selling, government securities by the Central bank. During, During, inflation, the bank will sell securities and during, , depression it will purchase securities from the public and, financial institutions. The Central bank uses this weapon, to overcome seasonal stringency in funds., , During, , inflation when there is too much money supply in the, , economy,, securities, reduces, , the, are, , their, , Central bank, , purchased by, cash, , reserves, , sells, , securities., , These, , the commercial banks., leading, , to, , a, , Ths, , reduction n, , credit creation. During depression, the Central bank buy, securities from the commercial banks and money flows, from the Central bank to the commercial banks. Tn>, , increases their cash reserve which in turn leads to, expansion of credit. This in turn will lead to increase in, for, investment, production and employment. Demana, the, g0ods and services will increase leading to a rise n to, price level. Thus, this weapons helps the Central bank, control the liquidity in the economy., , (c) Cash Reserve Ratio: It is, , a, , powerful instrument ,, , ne, , hands of the Central bank to control credit. 1ne, of, , commercial banks have to keep a certain percentage, , Mo

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Monetary P o l i c y, , 153, , deposits, , with the Central bank. It is, a statutory, requirement to ensure liquidity and solvency of the, , their, , banks. By adjusting the cash reserve ration, credit, creation by commercial barnks can be controlled. During, inflation the Central bank increases the cash reserve ratio,, , the funds available for credit creation will decrease. On, the contrary when the cash reserve ratio is reduced, , during depression, the credit creating capacity of banks, will increase. For e.g.,, the Reserve Bank of India over a, , period of time reduced the CRR from 15% in 1991 to 4%, in 2013 to, , improve liquidity., , d) Statutory Liquidity Ratio (SLR): Statutory liquidity ratio, refers to the percentage of net demand and time liabilities, that must be held by the commercial banks in the form of, approved, , government securities., , Through SLR,, , the, , central bank can control the credit created by commerCial, banks and it can also easily mobilise resources for the, to, government. During inflation, SLR is increased, contract credit created by commercial banks and during, In, depression SLR is reduced to exparnd credit creation., was, the case of the Indian economy for example SLR, 38.5% in 1991. Gradually it has been reduced. At present, , SLR is 19.5%., , (e) Repo, , Rate:, , Repo, , repo is transacted,, investor with, , an, , refers to, securities, , repurchase option., are, , agreement, , predetermined rate and, the, the rate at which, , sold, to, , by, , When, , a, , the seller to the, , repurchase it at, , a, , simple terms, it refers to, central bank gives loans and, , date. In, , advances to commercial banks against their securities., rate is increased and during, During inflation, repo, lowered to regulate the availability and, recession, it is, For example, in India, the RBI revised the, cost of credit., 2010 to, 13 times during the period March, repo rate, to regulate liquidity in the market. In the, January 2012, often used by the RBI to, recent times this weapon is, At present the, money supply in the economy., , control, repo, , rate, , is 6.5%.

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Vipul'sM Business, , nomics, , 154, , (f) Reverse Repo:, , Reverse, , commercial banks, , park, , repo, , refers to the, , their funds with, , rate, , the, , rate at which the, In other words, it is the, , 1, , (SEC, at wh:, -, , MC, , .hich, bank, central ha, , central, , oank, , borrows from the commercial banks. While repo helns, to, inject liquidity into the market, reverse repo helps, , absorb liquidity from the market. When repo is reui., ised, automatically, T, ly, revised., The, reverse, gets, repo, the RBI,, , by, difference, , I, , between the two rates is always 100 basi, , points or 1%. Both repo and reverse repo are very usefu, to control credit and ensure stability. Ihe current reverse, , repo rate is 5.75%., (2) Qualitative Instruments: Qualitative credit control is also, known as selective credit control. This method is used to, control the flow of credit to particular sectors of the economy., , Here, the direction of credit is regulated by the Central bank., There are various weapons of selective credit control like, variation in margin requirements, ceiling on credit, moral, suasion differential rate of interest etc. The selective credit, control is used as a complementary to quantitative credit, control to discourage the flow of credit to unproductive, sectors and speculative activities and also to attain pice, , stability., The Central banks use a combination of quantitative and, qualitative credit control methods to bring about economc, stability. The various weapons in the hands of the Centra, bank, , are, , adjusted according, , to the, , requirements, , or, , u, , economy. During inflation the Central bank takes tn, , following steps:, (a) Increases the bank rate., (b) Sells securities., (c) Increases the cash, reserve ratio., (d) Rises the, (e), , Controls, , margin requirements., , purposes., , credit, , for, , unproductive, , During depression the bank follows, , Generally,, , it is, , Speculative, , and, , spe, , the reverse Pr, , believed that, monetary policy, , is en, , i, , d