INSTITUTE - USB

DEPARTMENT - BBA
Subject Name- Banking & Insurance
Subject Code- 22BAT-324
Faculty Name – Mr. Vivek Sharma (E13500)

DISCOVER . LEARN . EMPOWER

Historical aspects of Banking in India
 Monetary Policy

Course Objective
1. To create awareness among the students regarding banking
and insurance concepts for better careers in this field
2. To apply the practical knowledge of Banking and
Insurance in a dynamic business environment.
Course Outcome

CO Title Level Image Address

Number https://bfsi.eletsonline.com/
CO4 To appraise the changing scenario of Analyze wp-content/uploads/
banking practices, products and 2021/02/RBI-Monetary-
services Policy.jpg

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 Table of Contents
S No. Contents Slide No.

1 Concept of Monetary Policy 4

2 Types and Key Objectives of Monetary 5-9

Policy

3 Tools and Recent Highlights of 10-14

Monetary Policy
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 1) Concept of Monetary Policy

•The monetary policy is a policy formulated by the central bank,

i.e., RBI (Reserve Bank of India), and relates to the monetary matters
of the country. The policy involves measures taken to regulate the
supply of money, availability, and cost of credit in the economy.
•The policy also oversees the distribution of credit among users as well
as the borrowing and lending rates of interest. In a developing country
like India, the monetary policy is significant in the promotion of
economic growth.

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 Types of Monetary Policy
• Expansionary Monetary Policy :If a country is facing high unemployment due to
a slowdown or a recession, the monetary authority can opt for an
expansionary policy aimed at increasing economic growth and expanding
economic activity.
• As a part of expansionary policy, the monetary authority often lowers the interest
rates in order to promote spending money and make saving it unattractive.
• Increased money supply in the market aims to boost investment and consumer
spending. Lower interest rates mean that businesses and individuals can get loans
on favorable terms.
• Many leading economies around the world have held onto this expansionary
approach since the 2008 financial crisis, keeping interest rates at zero or near zero.

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• A contractionary monetary policy increases interest rates in
order to slow the growth of the money supply and bring down
inflation. This can slow economic growth and even increase
unemployment but is often seen as necessary to cool down the
economy and keep prices in check.

Important Note: Do not mix types of Monetary Policy with

Stances of Monetary Policy.( Hawkish,Dovish,Accomodative and
Neutral)
Refer: https://optimizeias.com/monetary-policy-stances/

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 Key Objectives of Monetary Policy
1. Inflation
Monetary policies can target inflation levels. A low level of inflation is
considered to be healthy for the economy. If inflation is high, a
contractionary policy can address this issue.
2. Unemployment
Monetary policies can influence the level of unemployment in the
economy. For example, an expansionary monetary policy generally
decreases unemployment because the higher money supply stimulates
business activities that lead to the expansion of the job market.

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3. Currency exchange rates
Using its fiscal authority, a central bank can regulate the exchange rates between
domestic and foreign currencies. For example, the central bank may increase the
money supply by issuing more currency. In such a case, the domestic currency
becomes cheaper relative to its foreign counterparts.
4. Promotion of saving and investment: Since the monetary policy controls the rate
of interest and inflation within the country, it can impact the savings and investment
of the people. A higher rate of interest translates to a greater chance of investment
and savings, thereby, maintaining a healthy cash flow within the economy.
5. Controlling the imports and exports: By helping industries secure a loan at a
reduced rate of interest, monetary policy helps export-oriented units to substitute
imports and increase exports. This, in turn, helps improve the condition of the
balance of payments.

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6. Managing business cycles: The two main stages of a business cycle are boom and
depression. The monetary policy is the greatest tool using which the boom and depression
of business cycles can be controlled by managing the credit to control the supply of money.
The inflation in the market can be controlled by reducing the supply of money. On the
other hand, when the money supply increases, the demand in the economy will also
witness a rise.
7. Regulation of aggregate demand: Since the monetary policy can control the demand in
an economy, it can be used by monetary authorities to maintain a balance between demand
and supply of goods and services. When credit is expanded and the rate of interest is
reduced, it allows more people to secure loans for the purchase of goods and services. This
leads to a rise in demand. On the other hand, when the authorities wish to reduce demand,
they can reduce credit and raise interest rates.

8. Helping with the development of infrastructure: The monetary policy allows

concessional funding for the development of infrastructure within the country.
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3. Key Tools of Monetary Policy (Quantitative)
Reserve Ratios
•Banks are required to keep aside a set percentage of cash reserves or RBI-
approved assets. Reserve ratio is of two types:
1. Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in
cash with the RBI. The bank can neither lend it to anyone nor can it earn any
interest rate or profit on CRR.
2. Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion
in liquid assets such as gold or RBI-approved securities such as government
securities. Banks are allowed to earn interest on these securities, however, it is
very low.

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Open Market Operations (OMO):
•In order to control the money supply, the RBI buys and sells
government securities in the open market. These operations conducted
by the Central Bank in the open market are referred to as Open Market
Operations.
•When the RBI sells government securities, the liquidity is reduced
from the market, and the exact opposite happens when RBI buys
securities. The latter is done to control inflation. The objective of
OMOs are to keep a check on temporary liquidity mismatches in the
market, owing to foreign capital flow.

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 Qualitative Tools of Monetary Policy

1. Margin requirements – The RBI prescribes a certain margin against

collateral, which in turn impacts the borrowing habit of customers.
When the margin requirements are raised by the RBI, customers will
be able to borrow less.
2. Moral suasion – By way of persuasion, the RBI convinces banks to
keep money in government securities, rather than certain sectors.
3. Selective credit control – Controlling credit by not lending to
selective industries or speculative businesses.

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 Recent Monetary Highlights
(April 5, 2024)
1) 6.5% remains the benchmark interest rate or repo rate.
2) GDP growth was held at 7% in 2024–25, down from 7.6% in the previous fiscal year.

3) This fiscal year, retail inflation is expected to average 4.5%, down from FY25's 5.4%.
4) To maintain a level that is both viable and readily manageable, net inflows by foreign
portfolio investors (FPI) amounted to $41.6 billion during 2023–24, the second-highest level
of FPI inflow after the 2014–15 Current Account Deficit in 2024–25.
4) In comparison to its peers in developing markets and certain mature nations, the Indian
rupee stayed mostly range-bound in 2023–2024. The most stable major currency in FY24 was
the INR.

5) The next meeting of the Monetary Policy Committee (MPC) is set for June 5, 7, 2024.

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 Summary
• The RBI's monetary policy benefits include controlling
inflation, ensuring price stability, and fostering economic
growth. It helps manage liquidity, stabilize the currency,
and maintain financial stability. By adjusting interest
rates, the RBI influences borrowing costs, encouraging
investment and consumption. Additionally, it addresses
unemployment and promotes sustainable economic
development through prudent regulation of the banking
sector.

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 Applications
• Gain knowledge about the Indian Banking & Insurance System
and how it is evolved over a number of years
• Banking & Insurance sector offers a fast-paced, continuously
challenging career
• Banking & Insurance Sector provides Professional training &
development opportunities

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 REFERENCES
• Reference Books
1. J.N. Jain & R.K. Jain: Modern Banking and Insurance, Regal Publications
2. A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management,
Mittal Publication
• Reference Website
•https://rbi.org.in/scripts/Annualpolicy.aspx

•https://www.thehindu.com/business/Economy/monetary-policy-committee-rbi-repo-rate-april-5-2024/arti
cle68031297.ece

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 THANK YOU

For any queries

Kindly Email:
vivek.e13500@cumail.in