PPT: Monetary Policy | Business Economics for CA Foundation PDF Download

 Page 1


Monetary Policy 
Page 2


Monetary Policy 
Understanding Monetary Policy
The Reserve Bank of India (RBI) employs 
monetary policy to:
Manage economic fluctuations
Ensure price stability with low inflation
Adjust money supply through securities 
trading
Open Market Operations influence short-term 
interest rates, affecting longer-term rates and 
economic activity.
Lower Interest Rates
Easing monetary policy
Raise Interest Rates
Tightening monetary policy
Page 3


Monetary Policy 
Understanding Monetary Policy
The Reserve Bank of India (RBI) employs 
monetary policy to:
Manage economic fluctuations
Ensure price stability with low inflation
Adjust money supply through securities 
trading
Open Market Operations influence short-term 
interest rates, affecting longer-term rates and 
economic activity.
Lower Interest Rates
Easing monetary policy
Raise Interest Rates
Tightening monetary policy
The Framework for Monetary Policy
Objectives
Provides clear guidance to 
policymakers
Analytics
Focuses on transmission 
mechanisms
Operating Procedure
Includes operating targets 
and instruments
Page 4


Monetary Policy 
Understanding Monetary Policy
The Reserve Bank of India (RBI) employs 
monetary policy to:
Manage economic fluctuations
Ensure price stability with low inflation
Adjust money supply through securities 
trading
Open Market Operations influence short-term 
interest rates, affecting longer-term rates and 
economic activity.
Lower Interest Rates
Easing monetary policy
Raise Interest Rates
Tightening monetary policy
The Framework for Monetary Policy
Objectives
Provides clear guidance to 
policymakers
Analytics
Focuses on transmission 
mechanisms
Operating Procedure
Includes operating targets 
and instruments
Transmission of Monetary Policy
Saving and Investment Channel
Interest rate changes affect cost of borrowing and 
returns on savings, influencing consumption and 
investment decisions across households and 
businesses.
Cash-flow Channel
Rate adjustments impact disposable income for 
borrowers and savers, altering spending capacity 
throughout the economy.
Asset Prices Channel
Policy changes influence valuation of bonds, 
equities, and real estate, creating wealth effects that 
modify consumption patterns.
Exchange Rate Channel
Interest rate differentials affect currency values, 
impacting import-export dynamics and international 
capital flows.
These transmission channels work with varying time lags and effectiveness, depending on 
structural factors in the Indian economy and global economic conditions.
Page 5


Monetary Policy 
Understanding Monetary Policy
The Reserve Bank of India (RBI) employs 
monetary policy to:
Manage economic fluctuations
Ensure price stability with low inflation
Adjust money supply through securities 
trading
Open Market Operations influence short-term 
interest rates, affecting longer-term rates and 
economic activity.
Lower Interest Rates
Easing monetary policy
Raise Interest Rates
Tightening monetary policy
The Framework for Monetary Policy
Objectives
Provides clear guidance to 
policymakers
Analytics
Focuses on transmission 
mechanisms
Operating Procedure
Includes operating targets 
and instruments
Transmission of Monetary Policy
Saving and Investment Channel
Interest rate changes affect cost of borrowing and 
returns on savings, influencing consumption and 
investment decisions across households and 
businesses.
Cash-flow Channel
Rate adjustments impact disposable income for 
borrowers and savers, altering spending capacity 
throughout the economy.
Asset Prices Channel
Policy changes influence valuation of bonds, 
equities, and real estate, creating wealth effects that 
modify consumption patterns.
Exchange Rate Channel
Interest rate differentials affect currency values, 
impacting import-export dynamics and international 
capital flows.
These transmission channels work with varying time lags and effectiveness, depending on 
structural factors in the Indian economy and global economic conditions.
Transmission of Monetary Policy
Transmission refers to how RBI's policy changes impact economic activity and inflation through a 
two-stage process:
Stage 1
Changes in monetary policy influence interest rates in the economy
Stage 2
Changes in interest rates affect economic activity and inflation
While the impact on output and inflation is evident, the exact mechanism and timing are not 
entirely predictable, often manifesting after an uncertain lag.