Term project_fina

Term project_fina - Monetary policy Monetary policy refers...

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Monetary policy Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal: achieving specific economic objectives, such as low and stable inflation and promoting growth. The main objectives of monetary policy in India are: Maintaining price stability Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth Financial stability The relative emphasis among the objectives varies from time to time, depending on evolving macroeconomic developments. Approach: The operating framework is based on a multiple indicator approach. This means that they monitor and analyze the movement of a number of indicators including interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output as they develop the policy perspectives. Tools: The Reserve Bank’s Monetary Policy Department (MPD) formulates monetary policy. The Financial Markets Department (FMD) handles day-to-day liquidity management operations. There are several direct and indirect instruments that are used in the formulation and implementation of monetary policy. Direct Instruments Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank. Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold. Refinance facilities: Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks. Indirect Instruments
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Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral. Open Market Operations (OMO): Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term. Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills. The mobilized cash is held in a separate government account with the Reserve Bank. Repo/reverse repo rate: These rates under the Liquidity Adjustment
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This note was uploaded on 06/05/2011 for the course MAGM 510 taught by Professor Khali during the Spring '11 term at Northern Virginia.

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Term project_fina - Monetary policy Monetary policy refers...

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