Q:- Evaluated the monetary policy of RBI 2009-10?

Ans:- Meaning of monetary policy:-

Monetary policy refers to the steps taken by the reserve bank of india to regulate
the cost and supply of money and credit in order to achieve the socio-economic
objectives of the economy. Monetary policy influence the supply of money the cist
of money or the rate of interest and the availability of money. One of the most
important function of reserve bank is to formulate and administer a monetary
policy. Such a policy refers to use of instruments of credit control by the reserve
bank so as to regulate the amount of credit creation by the banks. It also aims at
varying the cost and availability of credit with a view to influence the level of
aggerate demand for goods and services in the economy.

Definition of monetary policy:-

According to DC. Rowan :- monetary policy as” discretionary act

undertaken by the authorities design to influence (a) the supply of money (b) cost
of money or rate of interest (c) the availability of money.

Under the control of reserve bank of india which regulate availability, cost ,and use
of money and credit with the aim of achieving optimum level of output and
employment, price stabilities, balance of payment equalibirum, or any other goals
set by the state and government.
Objectives of monetary policy:- in india, during the planning period the
basic objective of monetary policy has been to meet the requirements of the
planned development of the economy. With this broad and basic objective, the
monetary policy has been pursed to achieve the following objectives of the
monetary policy of the government of india.

(1) To accelerate the process of economic growth:-

One of the twin aims of economic policy is to
accelerate the process of economic growth with a view to raise the national
income. The reserve bank has made the allocation of funds to the various
sectors according to the priorities laid down in the plans and requirements of
day to day development.

(2)controlled expansion:- the second objective is to control the prices and

reduce the inflationary pressures in the economy. The monetary policy of the
reserve bank during the planning period is appropriately termed as that of
“controlled expension” every economy faces two conflicting interests:-

(a)expansion of money supply to finance the process of economic

development.
(b) Control of money supply to check inflationary pressure generated in the
economy as a result of vast development and non-development
expenditure.

Instrument of monetary policy :-

Economic indicator of india :-
Qunatitative measures:-

(1) Bank rate :- the traditional definition of bank rate says that it refers to
the rate at which the central bank rediscount the eligible bills. In broader
sense” it refers to the minimum rate at which the central bank provides
financial accommodation to commercial banks in the discharge of its
functions as the lender of the last resort.” Bank rate is that rate at which
reserve bank of india lends to other commercial banks . the present bank
rate is 6%.

(2) Rapo rate:- it the rate which reserve bank of india lends to the short
terms fund to commercial bank. In present rato rate is 5.75%.

(3) Reverse rate:- reverse rate is that rate at whoch reserve bank of india
borrow the short term fund in commercial bank. in present reverse rateis
4.5%.

(4) Cash reserve ratio:- commercial bank in every country maintain a

certain percentage of their deposits in the form of balances with the
central bank which is kniwn as crr or cash reserve requirement . if crr is
10%, for example , the maximum amount a bank can lend is equivalent to
90% of total reserve. Rbi is empowered to vary the crr between 3% to 15%
of total demand and time liabilities. Crr is that ratio is which at the
commercial bank is required to keep a certain percentage of its demand
and time deposits with rbi in cash . in present time crr is 6%.
(5) Statutory liquidity ratio :- apart from cash reserve requirements all
commercial banks are required to maintain, under sec 24 of the banking
regulation act 1949, liquid assests in the from of cash, gold and
unencumbered approved securities. This is known as statutory liquidity
ratio and it cannot be less than 25% of their total demand and time
deposit liabilities. Commercial bank also required to keep to in addition to
crr a certain percentage if there time and demand deposit. In the form of
cash or gold or security.

Qualitative measures:-

(1) Regulation of marginal requirements on loans:-

the reserve bank fixed the minimum marginal requirements on loans for
purchasing or carring securities. Margin is the difference between the
market value of the security and the amount lent by the banks against
these securities. The basic aim of this method is to restrict the use of
credit to purchase or carry securities by the speculators. Minimum
requirements of loan is the percentage value of the security which cannot
be borrowed or lent orin other words, it is the maximum value of loan
which a person can get from the banks against the securities.

(2) Regulation of consumer credit:-

in the economy check the inflationary pressures. Another method of
selective credit controls is the regulation of consumer credit. This credit is
generally given to the consumer for the purchase of durable goods. The
 consumer credit schemes which are adopted by the banks require that a
certain percentage of the consumer durable goods is paid by the
consumer in cash . the balance amount is financed by the bank through
bank credit which is repayable in monthly instalements over aperiod of
time.

(3) Rationing of credit:-

Rationing of credit is another technique of selective credit control.
Under this method , the reserve bank fixes the quota for member banks as
well as their limits for the payment of bills. The quota system was first
introduced in1960. If the member banks seek more loans than the quota
which is fixed for them. They will have to pay higher rate of interest to the
reserve bank than the prevailing bank rate.

(4) Credit authorization scheme:-

Credit authorization scheme as a selective credit control, was
introduced by the reseave bank of india in November 1965. Under this
scheme the commercial banks had to seek authorization from the reserve
bank before sanctioning any fresh limit of Rs crore or more to any single
party. The main purpose of credit authorization scheme is to keep a chose
watch on the flow of credit to the borrowers. It requires that the banks
should tend to large borrowing concerns on the basis of credit appraisal
and actual requirement of the borrowers.
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