Evaluate the Statement:"Investors should be aware of the
monetary policy before planning their investments“.
Illustrate with example.
PGDBM-6Group-4
Presented By: Enrollment No.Alpha Nayak E13CC1079751Anupriya Singh E13CC1078654
Karishma Biswal E13CC1081714Smruti Ranjita Suar E13CC1079865
Subhasantak Mohanty E13CC1081206Sujnani Kumari Gupta E13CC1080945
ET F
inPro
Mod
ule 0
2
Agenda1. Introduction
2. Monetary policy
3. Key Objectives of Monetary Policy
4. Instruments used by RBI under its monetary policy
5. Illustration using 3 Investment Options
6. Implication on Bank deposits
7. Implication on Stock market
8. Implication on Government Securities
9. Conclusion
Introduction While economic education and awareness make private decision making
easier, this knowledge and insight also may make the central bank’s job easier. A central bank’s commitment to education, information, and transparency enhances that central bank’s credibility , as well as the public’s ability to understand and anticipate policy decisions.
How does this work?
If the public is able to accurately anticipate monetary policy decisions, then it also can incorporate better-informed expectations into private decision making.
Central banks can contribute to this awareness in at least two ways: through transparency in monetary policy making and public information and education efforts.
source:SF%20Fed%20%20Awareness%20about%20monetary%20lpolicy
Monetary policy Monetary policy is the macroeconomic policy laid down by the
central bank.
It involves management of money supply, interest rate and the demand side of economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral suasion and through many other instruments.
Key Objectives of Monetary Policy
To maintain Price Stability (to
control the rate of inflation)
To achieve high Economic Growth (to attain higher
percentage growth of GDP)
CRR
• The percentage of the bank deposits that banks have to keep with RBI in the form of reserves or balances.
SLR
• The quantity of liquid assets that a bank has to keep with itself (in the form of cash, precious metals, etc.) for its time and demand liabilities.
OMO
• The operation of buying and selling of primarily government bonds from or to the public or banks.
Repo
rate
• The rate at which RBI lends to commercial banks generally against government securities(for a short term).
Bank
rate
• The rate at which RBI lends to commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements(for a long term).
Instruments used by RBI under its Monetary Policy
Implication on Bank Deposit
CRR
CRR increases (RBI targets inflation),
deposit rate increases.
CRR decreases, (RBI targets economic growth), deposit
rate decreases
SLR
SLR increases (RBI targets inflation),
deposit rate increases.
SLR decreases (RBI targets economic growth), deposit
rate decreases
Implication on Bank Deposit (contd.)
OMO
When G-secs are sold, less money prevails in the system,
(aim behind it being controlling inflation), deposit
rate increases
When G-secs are bought (issued previously),more
money prevails in the system, (aim behind it being higher economic growth), deposit
rate decreases
Implication on Bank Deposit (contd.)
Repo rate
Repo rate increases, lending intrest rate increases, deposit rate too increases
Repo rate decreases, lending intrest rate decreases, deposit rate too decreases
Bank rate
Bank rate increases, lending intrest rate increases, deposit rate too increases
Bank rate decreases, lending intrest rate decreases, deposit rate too decreases
Implication on Stock Market
CRR
CRR increases, Economic growth decreases,
production cost increases, profitability of company decreases, stock market
crashes
CRR decreases, Economic growth increases,
production cost decreases, profitability of company increases, stock market
flourishes
SLR
SLR increases, Economic growth decreases,
production cost increases, profitability of company decreases, stock market
crashes
SLR decreases, Economic growth increases,
production cost decreases, profitability of company increases, stock market
flourishes
Implication on Stock Market (contd.)
OMO
When G-secs are sold, less money prevails in the
system, (aim behind it being controlling inflation),
production & product cost increases, profit to company
decreases, share price decreases & stock market
crashes
When G-secs are bought (issued previously),more
money prevails in the system, (aim behind it being
attaining higher economic growth), production & product cost decreases,
profit to company increases, share price increases & stock
market booms
Implication on Stock Market (contd.)
Repo rate
Repo rate increases, lending intrest rate increases,
production & product cost increases, profit to company
decreases, share price decreases & stock market
crashes
Repo rate decreases, lending intrest rate decreases,
production and product cost decreases, profit to company
increases, share price increases & stock market
booms
Bank rate
Bank rate increases, lending intrest rate increases,
production & product cost increases, profit to company
decreases, share price decreases & stock market
crashes
Bank rate decreases, lending intrest rate decreases,
production and product cost decreases, profit to company
increases, share price increases & stock market
booms
Implication on Government securities
CRR
CRR increases (RBI is targeting inflation),
further, RBI sells G-sec bonds to pull out excess money from the system
CRR decreases (RBI is targeting economic
growth), further, RBI buys pre-issued G-sec
bonds to pump in more money into the system
SLR
SLR increases (RBI is targeting inflation),
further, RBI sells G-sec bonds to pull out excess money from the system
SLR decreases, (RBI is targeting economic
growth), further, RBI buys pre-issued G-sec
bonds to pump in more money into the system
Implication on Government securities (contd.)
OMO
When G-secs are sold, RBI’s aim is to pull out money
from the system (to control inflation)
When G-secs are bought (issued previously), RBI’s
aim is to pump more money into the system (to attain higher economic growth)
Implication on Government securities (contd.)
Repo rate
Repo rate increases, lending interest rate increases (RBI
is targeting inflation), further, RBI sells G-sec
bonds to pull out excess money from the system
Repo rate decreases, lending intrest rate decreases (RBI is targeting economic growth), further, RBI buys pre-issued
G-sec bonds to pump in more money into the system
Bank rate
Bank rate increases, lending interest rate increases (RBI
is targeting inflation), further, RBI sells G-sec
bonds to pull out excess money from the system
Bank rate decreases, lending intrest rate decreases (RBI is targeting economic growth), further, RBI buys pre-issued
G-sec bonds to pump in more money into the system
ConclusionAwareness about the Monetary policy of a country is undoubtedly
beneficial for the financial well-being of its citizens.
People unaware of it cannot yield (or make) the most from a situation at hand, as it leaves them clueless about where the economy is
heading.
Knowledge about the economy, changes people’s perception & vision.
If they know well, only then can they have a financial plan that is better & healthy.
For, “Knowledge is Power &
Power ofcourse, fetches Wealth”