Page 131 - DMGT401Business Environment

Business Environment

Notes 5.6 Summary

Monetary policy is about supply of the currency in the country, regulated by the RBI.
Though the RBI does it in the light of the fiscal policy and macro objectives of the
government, it is in this sense that fiscal policy and monetary policy are complementary.
There are various factors affecting money supply in India. Some of them are as follows:
net bank credit to the bank, bank credit to the commercial sector, net foreign exchange
assets of the banking sector, government currency liabilities to the public, non-monetary
liabilities of the banking sector.
There is a direct relationship between supply of money and inflation. As the supply of
money increases, it value goes down and inflation increases. Supply of money has also an
impact on the interest rate and level of investment.
It is the RBI, which regulates the supply of money in India. It performs various functions
as Issue of Currency, Banker to Government role, Banker's Bank, Controller of Credit
Exchange , Management and Control, Supervisory Function and Promoter of the Financial
System.
The RBI has various tools, which can be used to control the supply of the money in the
economy. Some of them are Open Market Operations, The Bank Rate, Direct Regulation of
Interest Rates, Cash Reserve Ratio, Statutory Liquidity Ratio, Direct Credit Allocation and
Credit Rationing. Besides these, there are some other such as Cash Authorisation Scheme,
Fixation of Inventory Norm and Credit Norms, Liquidity Adjustment Facility (LAF),
Moral Suasion and REPOs.

5.7 Keywords

Bank Rate: The bank rate, which is also known as discount rate, is the rate at which the central
bank discounts advances to the commercial banks.
Cash Reserve Ratio: The CRR refers to the cash that banks have to maintain with the RBI as a
certain percentage of their demand and time liabilities.
Liquidity Adjustment Facility (LAF): In LAF the amount of REPO and reverse REPO are changed
on a daily basis to manage liquidity.
Monetary Aggregates: These are two basic measures of money globally.
Open Market Operations: The open market operation involves the sale and purchase of
government securities by the RBI.
REPOs: A REPO is purchase of one loan against the sale of another.
Selective Credit Control: Selective and qualitative credit control refers to regulations of credit
for specific purposes or branches of economic activity.

5.8 Self Assessment

Fill in the blanks:
1. .................................. is about expansion and contraction of money and the central bank is
the implementing body of the monetary policy
2. .................................. equals to M2 + Term Deposits of residents with a contractual maturity
of over one year with the Banking System + Call/Term borrowings from 'Non-depository'
Financial Corporations by the Banking System.

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