Introduction

The Reserve Bank of India (RBI) began its exit from expansionary monetary policy in October 2009
by reducing the potential liquidity in the system. As a part of the policy, cash reserve ratio of banks
was increased by 75 basis points in January 2010 followed by increases in policy reverse repo and
repo rates by 25 basis points each in March 2010. The RBI has further announced policy measures to
manage inflationary expectations as well as to maintain economy’s growth momentum in Annual
Policy Statement 2010-11. While the bank rate has been retained at 6.0%, the repo rate as well as the
reverse repo rate under the liquidity adjustment facility (LAF) has been raised by 25 basis points
each from 5.0% to 5.25% and 3.5% to 3.75%, respectively. CRR of scheduled banks has also been
increased by 25 basis points from 5.75% to 6.0% of their net demand and time liabilities (NDTL)
effective from the fortnight beginning April 24, 2010. Banks have however announced that they will
not raise the interest rate in the immediate future though they expected the rates to go up in near
future.
Taking into account the need to balance the resource demand to meet credit
offtake by the private sector and government borrowings, monetary projections
have been made consistent with the growth and inflation outlook. M growth for 3

2010-11 is estimated at 17.0%. Aggregate deposits of SCBs are projected to

grow by 18.0% for the same period. The growth in non-food credit of SCBs is
placed at 20.0% in 2010-11.

Definition

Monetary policy is the process by which the central bank or monetary authority of a country
controls the supply of money, often targeting a rate of interest. Monetary policy is usually used
to attain a set of objectives oriented towards the growth and stability of the economy.These goals
usually include stable prices and low unemployment. Monetary theory provides insight into how
to craft optimal monetary policy.

Meaning :

Monetary policy is referred to as either being an expansionary policy, or a

contractionary policy, where an expansionary policy increases the total supply of
money in the economy rapidly, and a contractionary policy decreases the total
money supply or increases it only slowly. Expansionary policy is traditionally used to
combat unemployment in a recession by lowering interest rates, while
contractionary policy involves raising interest rates to combat inflation. Monetary
policy is contrasted with fiscal policy, which refers to government borrowing,
spending and taxation.