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INTRODUCTION
It refers to the use of official instruments under the control of central bank to regulate the availability, cost & use of money and credit with the aim of achieving optimum levels of output & employment, price stability, balance of payments equilibrium or any other goals set by the state
Monetary Policy
Demand for Money Transaction Demand Precautionary Demand Speculative Demand
Monetary Policy
Supply vs. Demand For Money: Money Supply; Done by Central Bank Is inelastic Excess supply vs. excess Demand and restoration of Equillibrium Shift in Money supply; shift in equillibrium
Inflation
Current 6.46% Inflation Target 5% Anticipated inflation: transaction costs Unanticipated inflation: decrease in wealth of lenders( Rise) or decrease in wealth of borrowers (fall) Destabilization of businesses.
Advantages: It is a signaling device and speaks about RBIs mind regarding money supply. Used to calculate penalties for non maintenance of CRR, SLR
III Statutory Liquidity Ratio: (23%) Percentage of DTL to be kept in liquid securities like dated securities, T-bills, State Development Loans.
IV. Open Market operations: Purchase and sale by the central bank of a variety of assets such as foreign exchange, gold, government securities.
VII. MARGINAL STANDING FACILITY In order to provide greater liquidity cushion, it has been decided to:
Domestic demand, consumption, GDP increase, exports rise while imports become costly and there is an increase in domestic inflation also.