Monetary Policies of Price Inflation.

Monetary Policies of Price Inflation.

Monetary policy is regarded as the best remedy for fighting inflation. Monetary policy refers to credit control measure adopted by the central bank of a country.

According to IIG, Johnson, “As policy employing central banks control of the supply of money as an instrument for achieving the objectives of general economic policy”.

G.K. Shaw, defines monetary policy as “Any conscious action undertaken by monetary authorities to change the quantity, availability of the money”.

Control of Price Inflation

  I.    Quantitative Control (General Control):

1)    Bank Rate Policy: The bank rate is the standard rate at which it is prepared to buy or rediscount bills of exchange and other commercial papers eligible for purchase.

2)    Open Market Operations: It is the purchase or the sale by the control bank, such as foreign exchange, gold, govt. securities and share of the companies.

3)    Variable Reserve Ratio (Requirement): Every bank is required by law to keep a certain percentage its total deposits in the form of reserve fund and also a certain percentage with RBI. By changing the ratio of these resources, the RBI seeks to influence credit creation power of commercial banks. It is of two types, they are:

a.    Cash Reserve Ratio (CRR): It refers to that portion of deposits of commercial bank which it has to keep with the RBI in the form of cash reserves. The RBI is empower to determine cash reserve ratio for the commercial banks in the range of 30% to 15% for the aggregate demand and time liabilities.

b.    Statutory Liquidity Ratio (SLR): It refers to that portion of total depth of a commercial bank which it has to keep with as it self in the form of cash reserves, i.e., a minimum of 25% against their net demand & line liability.

II.    Selective Credit Control: These are generally meant to regulate credit for specific purpose. There are three techniques of selective credit controls, they are:

a.    The determination of margin requirement for loans.

b.    Determination of maximum amount of advance & charging of discriminatory.