MONETARY POLICY | CENTRAL BANKING NOTES
We will discuss different aspects of Monetary Policy from the latest Central Banking study material for the JUNE 2024 exams in this post.
IIBF conducts the CAIIB exam twice every year. Candidates who have cleared the JAIIB exam can appear in the CAIIB June 2024 Exam. Central banking is one of the elective CAIIB exams of June 2024. Our experts have been working on the CAIIB June 2024 study material, which would include various services like videos, notes in the form of ePDFs, mock tests, etc. The details of this upcoming CAIIB study material in June 2024 are discussed later in this article. First, we would like to discuss the main topic of Monetary Policy and all the aspects related to it.
WHAT IS MONETARY POLICY?
A country’s central bank uses a set of instruments called monetary policy to regulate the total amount of money in circulation, foster economic expansion, and implement measures like adjusting interest rates and altering bank reserve requirements.
Controlling the amount of money in an economy and the channels through which it is provided is known as monetary policy.
Monetary policy strategy is influenced by economic indicators, including the GDP, inflation rate, and industry- and sector-specific growth rates.
The interest rates that a central bank charges to lend money to the country’s banks are subject to change. Financial institutions modify rates for their clients, such as businesses or homebuyers, as interest rates charged by Central Banks rise or fall.
The Reserve Bank of India’s monetary policy in India aims to manage the amount of money in order to meet the needs of various economic sectors and quicken the rate of economic growth.
The RBI uses a variety of tools to carry out monetary policy, including open market operations, bank rate policy, reserve system, credit control policy, and moral persuasion. Utilizing any of these tools will result in adjustments to the economy’s money supply or interest rate. Both expansionary and restrictive monetary policies are possible. An expansionary policy is shown by rising the money supply and falling interest rates. A monetary policy that is contractionary is the opposite of this.
MONETARY POLICY’S OBJECTIVES
Management of unemployment or inflation, as well as preservation of currency exchange rates, are the key goals of monetary policies.
Levels of inflation may be the focus of monetary policies. Economic experts believe that a low amount of inflation is beneficial. A contractionary policy can help with the problem of rising inflation.
The amount of unemployment in the economy can be affected by monetary policies. As an illustration, a monetary policy that is expansionary tends to reduce unemployment since it increases economic activity and the job market.
Currency Exchange Rates
A central bank can control the rates at which domestic and foreign currencies are exchanged by exercising its fiscal authority. By issuing additional money, for instance, the central bank might expand the money supply. In this scenario, the native currency depreciates in value in comparison to its international counterparts.
Monetary policies can be either expansionary or restrictive, depending on their goals.
EXPANSIONARY MONETARY POLICY
By lowering interest rates, having central banks buy government securities, and cutting bank reserve requirements, this monetary policy seeks to boost the amount of money in circulation in the economy. Reduced unemployment, boosted corporate activity, and increased consumer spending are all benefits of an expansionary strategy. Boosting economic growth is the overarching objective of the expansionary monetary policy. However, it can also result in higher inflation.
CONTRACTIONARY MONETARY POLICY
An economy’s money supply should be reduced as a result of a contractionary monetary policy. Increased reserve requirements for banks, bond sales, and higher interest rates are all ways to do this. When a government seeks to suppress inflation, it uses a contractionary policy.
TOOLS FOR MONETARY POLICY
All central banks use the same three monetary policy tools given below:
- Open Market Operations
Open market operations are used by all central banks (OMO). OMO allows the central bank to issue new money while simultaneously purchasing government securities like Treasury bonds. The central bank can also reduce the amount of money in circulation by selling the securities on its balance sheet and withdrawing the money received.
- The Reserve Prerequisite
The reserve requirement is the process by which central banks mandate how much cash each member must keep on hand at all times. Since not everyone needs their whole savings every day, it is safe for the banks to lend the majority of it out. They may then meet the majority of redemption requests since they have adequate cash on hand. This reserve requirement was 10% in the past.
Raising the reserve requirement is one way a central bank might limit liquidity. It reduces the requirement when it wishes to increase liquidity. Because of this, member banks have more money to lend.
- Amount of the Discount
The cost for members to borrow money from a central bank’s discount window is known as the discount rate. To deter banks from borrowing, it raises the discount rate. By doing so, the economy suffers from less liquidity. It promotes borrowing by decreasing the discount rate. In turn, this encourages growth and liquidity.
CAIIB | IIBF | LATEST CENTRAL BANKING STUDY MATERIAL JUNE 2024
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