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Evaluate the Statement:"Investors should be aware of the
monetary policy before planning their investments“.
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.
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).