Monetary Policy
What is
Monetary
Policy
• Policy employing central bank's
control over supply of money as
an instrument for achieving
general economic goals,
• Control over Inflation
• Increasing Economic Growth
• Providing Full Employment
• Price Stability
Objectives of Monetary Policy
• FULL EMPLOYMENT:
• BALANCE OF PAYMENT:
• EQUAL INCOME DISTRIBUTION:
• EXCHANGE RATE STABILITY:
• ECONOMIC GROWTH:
• ECONOMIC DEVELOPMENT:
• CONTROL OVER INFLATION:
• PRICE STABILITY:
• for example:
EXCHANGE RATE is the rate at which one currency is exchnged to an other
currency such as $1 exchanged to Pakistani Rs is $1 to Rs 171.5 it means to
get one dollar we pay 171.5 Pak Rs.
• EXPANSIONARY MONETARY
POLICY
• CONTRACTIONARYY
MONETARY POLICY
Types of
MoneTtry Policy
EXPANSIONA
RY
MONETARY
POLICY
CONTRACTION
ARY MONETARY
POLICY
INSTRUMENTS OF MONETARY
POLICY
• Bank Rate
• Open Market Opertion
• Reserve Requirement Ratio:
BANK RATE: Interest rate charged to Banks that borrow money from
Central bank for short period of time without keeping any collateral.
Interest rate which is paid by depository institutions on short term
loans.
Open Market Operation
• OMO: Open market operations are means of implementing monetary
policy by which central bank controls its national money supply by
buying and selling govt securities or other financial instruments.
Reserve
Requirement Ratio
• A certain fraction or percentage of deposits that a
depository institute is required to reserve at
Central bank.
• It is minimum specified fraction of total dep
osits of customers, which commercil banks have
to hold as reserves either in cash or deposits with
central bank.
• CRR is set according to guidelines of Central Bank.
Repo Rate
• REPO RATE: It is the rate at which Central bank of a country
lends money to commercil banks by selling govt securities
to Central bank at the event of any shortfall of funds.
• LIQUIDITY RATIO: It is minimum percentge of total deposits
that Commercial banks maintain with Central banks in the
form of Cash, Govt securities and Gold
• REVERSE REPO RATE: It is short term borrowing rate at
which Central bank borrows money from banks when there
is excess of money floating in the banking system.
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