Group Members

1. Zubaida Shehzadi
2. Amina Sahar
3. Zaid
4. Talal Zafar
5. Maryam
 Monetary Policy:

 Definition:
“Monetary Policy is the macroeconomic policy
laid down by the central bank. It involves the
management of money supply and interest rate.”
 KEY TAKEAWAYS:
Monetary policy is a set of actions to control a
nation's overall money supply and achieve economic
growth.
Monetary policy strategies include revising
interest rates and changing bank reserve
requirements.
Monetary policy is commonly classified as
either expansionary or contractionary.
 The Federal Reserve commonly uses three strategies
for monetary policy including reserve requirements, the
discount rate, and open market operations
 Meaning:
Monetary policy refers to that policy through which the
central bank of the country (RBI) controls, (a) supply of
money, (b) availability of money, (c) the cost of money or
the rate of interest rate in order to attain a set of
objectives focusing on growth and stability of the
economy
 Understanding Monetary Policy
Monetary policy is the control of the quantity of
money available in an economy and the channels by
which new money is supplied. Economic statistics such
as gross domestic product (GDP), the rate of inflation,
and industry and sector specific growth rates influence
monetary policy strategy.
 Objectives of Monetary Policy:
There are different objectives of
Monetary Policy:
o Full Employment
 o Economic Growth
o Price stability
o Exchange stability
o Reduction in Economic inequalities
1. Full Employment:
Full employment refers to the situation
wherein all persons who are able to work and willing to
work at the prevailing wage rate, get work. To achieve
it, the level of demand and output need to be
sustainability raised.
For this purpose, the government adopts cheap
money policy under which rate of interest is lowered
in order to expand the availability of credit, both for
the purpose of investment as well as consumptions.
2. Economic Growth:
Economic growth refers to the process of
sustained rise in real income per-capita. In UDC’s income
and standard of living of the people are low. This is
associated with low production capacity is low mainly
because of low rate of capital formation.
On account of low rate of capital formation these
economies fail to utilize fully their natural and
human resources. Accordingly, the governments
adopt such a
monetary policy as may accelerate the rate of
capital formation in the country.

3. Price Stability:
Another objective of the monetary policy is to
attain price stability in the country. Price stability means
control of wide fluctuations in the general price level in
the economy. Consistently upward trend of prices,
called inflation. Two factors mainly account for price
inflation i.e.;
(a) Rise in demand
(b) Fall in production due to rise in cost of
production
4. Exchange stability:
Stability of foreign exchange rate is yet another
objective of Monetary policy. Exchange rate stability is
linked with the stability of BOP and monetary policy
seeks to regulate foreign exchange resources in a
manner that imports stability to a supply and demand
parameters in the international money market.
5. Reduction in Economic Inequalities:
In the capitalist and mixed economies, there are
widespread inequalities in the distribution of wealth
and
income. As a result, the society is divided into two
classes: i.e. rich and poor. Rich class exploits poor.
Monetary policy serves as an instrument of achieving
equitable distribution of income and wealth through
faster delivery of credit to weaker sections of the society
at lower rate of interest.
 Types of Monetary Policy:
There are two types of Monetary Policy:
 Expansionary Monetary Policy
 Contractionary Monetary Policy
1. Expansionary:
Expansionary monetary policy is a strategy
employed by central banks to stimulate economic
growth by increasing the money supply and lowering
interest rates. The primary goal is to encourage
borrowing, spending, and investment, which, in turn, can
boost overall economic activity.
2. Contractionary:
Contractionary monetary policy is a strategy
employed by central banks to slow down economic
growth and control inflation. It involves reducing
the
money supply and increasing interest rates to curb
spending and investment.
 Instruments/Tools of Monetary
Policy:
Instruments of monetary policy are:
(A) Quantitative Instruments
I. Bank rate
II. Open Market Operations
III. Cash Reserve Ratio
IV. Statutory Liquidity Ratio
(B) Qualitative Instruments
I. Change in Margin requirements
II. Rationing Credit
III. Direct Action
IV. Moral suasion
 Quantitative Instruments:
1. Bank Rate:
It refers to the rate of interest at which the central bank
lends to the commercial banks. It deals with the instant
loan requirement of the commercial banks. Under
these loans, are offered without any collateral.
2. Open Market Operations:
It refers to the sale and purchases of securities in the
open market by the central bank on the behalf of the
government.

3.Cash Reserve Ratio (CRR):

•It refers to the minimum percentage of a bank’s total
deposits required to be kept with central bank. CRR is
fixed by the central bank (RBI) and it is changed
according to situation in order to control supply of
money in an economy.

•4.Statutory Liquidity Ratio

(SLR):
•Every bank is required to maintain a fixed
percentage of its assets in the form of liquid assets
known as SLR. It includes cash gold and approved
securities.

 Qualitative Instruments:
•It includes all those instruments which are used to
allocates funds in a particular sector. These
instruments are used to increase or decrease the
supply of money to the selected sectors of the
economy.
1.Change in Margin requirements:
•It refers to the difference between the current value of
the security offered for loans (collateral) and the value
of loan granted.
 Collateral 50 lakhs
Loan amount 30 lakhs
Margin requirements = 50 – 30 = 20 lakhs
2. Rationing of Credit:
It refers to fixation of credit quotes for different
business activities. Central bank fixes credit quotes for
different business activities.
3. Direct Action:
Central bank may initiate direct action against the
commercial banks for not following its directions. The
Central bank may impose strict instructions on the
functioning of defaulting banks including denial of
loans.
4. Moral Suasion:
Under this, the commercials banks are advised by
central banks to follow its directives. The banks are
advised to restrict loans during inflation and to be liberal
in lending during deflation.
 Conclusion:
Through all this points and references I concluded that
the monetary policy is framed for the economic as well as
for the control over the flow of money under different
conditions that may cause by inflation and deflation in an
economy. There are many objectives of monetary policy
as stated above which deals with how monetary policy
affects the price and other factors.