Understanding Monetary Policy: Objectives and Instruments Explained

hello everyone my name is minisetti I hope you all are staying healthy today we are going to talk about meaning

objectives and instruments of monetary policy what is monetary policy monetary policy is a process by which Central

Bank of the country control money supply availability of money cost of money such as interest in order to maintain

stability and growth in economy monetary policy is a process by the Central Bank of the country control money supply

availability of money cost of money such as interested in order to maintain stability and growth in economy as we

all know increase and decrease in money supply creates so many fluctuation in economy that's why Central Bank of the

country control money supply so that stability and growth can be maintained in economy now we are going to talk

about objectives of monetary policy first objective of monetary policies price stability as money supply increase

demand will also increase is because now people have more money in hand that's why they are creating more demand as

demand increased prices also increase if prices are continuous increasing it will create inflation in economy during this

time period to control inflation Central Bank through monetary policy reduce money supply as money supply reduce

demand reduce demand reduce and prices also reduce second objective is economic growth through monetary policy Central

Bank of the country reduce interest rate as interest rate reduced people are taking more money from banks for

investment purpose as a result investment increase as investment increase income and output also increase

as a result our economy is growing next objectives reduces unemployment through monetary policy Central Bank of the

country increase money supply as money supply increase business activities also increase people are starting their new

business they are expanding their existing business as a result they are creating new jobs in market and

unemployment will fall next objectives reduction in economic inequalities economic inequality is the gap between

rich and poor through monetary policy Central Bank of the country give credit to weaker section of society as lower

interested so that they can start their small business and gap between rich and poor can be reduced now we will see

instruments of monetary policy instruments of monetary policy are divided into two parts quantitative

instruments and qualitative instruments quantitative instruments include cash Reserve ratio statutory liquidity ratio

repo rate rewards report bank rate and open market operation and qualitative instruments include marginal requirement

rationing of credit moral suration and direct action one by one we discuss about each firstly we are going to talk

about quantitative instrument first quantitative instrument is Cash Reserve ratio in short we consider crr so what

is crr crr is some percent advantage of total deposit of banks that they need to keep a Central Bank in form of cash only

crr is some percentage of A bank's total deposit that they need to keep with Central Bank in form of cash only for

example total deposit of Commercial Bank is one crore and they need to keep five percent of one crore as a cash with

Central Bank and crr is decided by Central Bank if Central Bank want to reduce money supply in market then it

will increase the rate of crr if crr increase means bank has to keep more money with the central bank and they

have a less amount to give loans to public when banks will give less loans to public money supply will reduce in

the market only another hadim Central Bank won't increase money supply it will reduce CR no banks has to keep less cash

with Central Bank they have more fund to give loans to public so bank will raise more loans to public as a result money

supply will increase in the market now we are going to talk about next quarter iterative instrument it will cause

statutory liquidity ratio in short we can say the SLR so what is SLR SLR is minimum percentage of deposit that

commercial bank has to maintain in form of cash gold and securities SLR is minimum percentage of deposit that

commercial bank has to maintain in form of cash gold and security I mean these cash gold and security Commercial Bank

cannot use for credit purpose they have to key with themselves don't confuse you to see RR and SLR in case of crr

Commercial Bank has to keep cash with Central Bank but in CNO SLR Commercial Bank has to keep gold the Securities and

cash with themselves not with Central Bank second difference in case of crr we include cash only but in case of SLR we

include Cash Gold and security same way as we discussed in crr SLR also decided by Central Bank if Central Bank want to

reduce money supply it will increase rate of SLR only foreign want to increase money supply it will reduce the

rate of SLR now we are going to talk on next quantitative instrument it will call reporade so what is reporter report

is a rate at which Central Bank of the country lends money to Commercial Bank Rapport rate is a rate at the Central

Bank of the country let's money to commercial sometime commercial Banker borrow money from Central Bank in return

they has to pay some interested and this interest rate is called reporate and second most important while lending

money to Commercial Bank Central Bank keeps of government security as a mortgage in case Commercial Bank not

return their money then it can easily sell this government security and recover its money if Central Bank want

to reduce money supply it will increase reported because when Rapport rate increase banks will increase in trusted

because they are paying higher report to Central Bank as interested increased people will take less loan from bank as

a result money supply will reduce in the market on the another and if Central Bank want to increase money supply to

reduce rapid it now we are going to talk about next quantitative instrument it will be called reverse report so what is

the reverse report reverse report is the rate at which Commercial Bank earn interest when they keep their Surplus

money with Central Bank rewards report is the rate at which Commercial Bank on interest when they keep their Surplus

money with central bank sometime Commercial Bank have extra money and they keep this extra money with Central

Bank in a return Central Bank pay them some interest rate it will call rewards report or we can say sometimes Central

Bank borrow money from Commercial Bank any returned it pay interest rate to Commercial Bank it will go rewards when

Central Bank want to reduce money supply it will increase rewards reported when reverse report increase Banks keep more

money with the central bank because it is very safe and secure as compared to giving loans to people so when the banks

keep more money with Central Bank they have a lesser fund to give loans to public as well they will give less loans

to public and money supply will reduce in the market now we are going to talk about next quantitative instrument it

will call bank rate bank rate is interested that is charged by a central bank while giving money to Commercial

Bank bank credit is interested that is charged by a central bank while giving money to Commercial Bank sometime

commercial and borrow money from Central Bank in return they have to pay some interest rate it will call bank credit

don't confuse between repo rate and Bank Credit in case of reported while taking loan from a central bank Commercial Bank

has to keep some government security as a mortgage but in case of bank credit Commercial Bank need not to keep any

government security and same way as we studied repor it if a central bank want to reduce money supply it will increase

bank rate only another item Central Bank want to increase money supply to reduce bank rate now we are going to talk about

next quantitative instrument it will call Open Market operation open market operation means buying and selling

government and securities by Central Bank of the country in order to control money supply open market operation I

mean buying and selling government securities by Central Bank of the country in order to control money supply

for example if Central Bank want to increase money supply it start buying security from the market when say a

central Banker buying security from the market in return paying money to Market it's in return giving money to Market as

a result Market has a more money and money supply will increase only another name Central may want to reduce money

supply from the market start selling Security in the market when Central Bank selling Security in the market means

money from the markets coming to Central Bank as a result Market has a less money money supply will reduce now we are

going to talk about qualitative instrument first qualitative instrument is margin requirement so what is margin

requirement margin requirement is difference between current value of security offer for loans and value of

loans granted margin requirement is different difference between current value of security offer for loan and

value of loans granted for example somewhere want to take a loan and keep his home as a mortgage or we can still

keep his home as a security and value of his home is one crore but Bank giving loan of 80 lakh difference between one

crore and 80 lakh is 20 like this 20 lakh is called margin requirement if Central Bank want to reduce money supply

it will increase margin requirement um for example if you want to take a loan of one lakh then you have to keep

the security of 2 lakh as Central Bank increase margin requirement people will take less loan from bank as a result

money supply will reduce from the market now we are going to talk on next qualitative instrumentative called

rationing of credit rationing of credit means that fixed limit for loans for different sector so that no sector is

neglected rationing of credit means that fixed limit for loans for different sectors so that no sector is neglected

in rationing of creditor Central Banker set maximum limit and Commercial Bank cannot give loans to particular sector

Beyond this limit for example in order to control money supply central banks at maximum limit Commercial Bank gives 60

loan to weaker section and 40 loans to higher class by doing this a particular section will go only limited amount of

money and we can control money supply now we are going to talk about next qualitative methods called moral suizen

under moral Susan Central Bank simply advise the request or convince Commercial Bank to control money supply

for example money supplies continue increasing during this time period Central Bank simply says to Commercial

Bank don't give more loans to public please cooperate with us next method direct action if Commercial Bank do not

cooperate with Central Bank and it is giving continue loans to public then Central Bank will take direct action

against Commercial Bank for example Central Bank will reject any application of Commercial Bank on put any another

restriction on Commercial Bank this is all about meaning objective instruments or monetary policy let's see I think you

got it and thank you so much for watching this video bye take care