INSTITUTE –University School of
Business
DEPARTMENT -Management
M.B.A
Faculty Name : Dr Ramneek Ahluwalia
(Assistant Professor)
UNIT-1 DISCOVER . LEARN . EMPOWER
Business Environment
1
LEARNING OBJECTIVES & LEARNING OUTCOMES
After studying this chapter, you should be able to:
• Understanding the meaning and concept of business environment.
• Exploring various functions of business environment.
https:// IMS Proschool
Business
Environment
Course Outcome
CO Title Level Will be covered in this
Number lecture
CO4 To examine business policies in international Remember
environment.
3
Source : WIKIPEDIA 4
Monetary Policy
Monetary Policy
• Monetary policy is a set of tools used by a nation's central bank to control the overall money
supply and promote economic growth and employ strategies such as revising interest rates and
changing bank reserve requirements.
• The purpose of monetary policy of Reserve Bank of India to achieve certain macroeconomic
objectives like liquidity, economic growth, to establish stability in the prices so as to control
inflation or interest rate and build a general interest in the economy.
Objectives of monetary policy
• Economic Growth
Monetary policy has another important objective i.e. economic growth. The economic growth can be
achieved by making credit availability to be adequate and lowering cost of credit. Economic growth
quickens when credit is available at low interest rate which ultimately stimulates investment.
• Exchange Rate Stability
The exchange rates between domestic and foreign currencies can be affected by monetary policy.
With an increase in the money supply, the domestic currency becomes cheaper than its foreign
exchange.
• Inflation control or price stability
Monetary policy has the major objective to control inflation or maintenance of price stability.
However price stability does not mean totally no changes in the prices. In a developing country like
India certain price level changes or inflation is quiet expected. Although there may be an adverse
effect of the high degree of inflation on the economy. Firstly the cost of living of the people is raised
by inflation. Secondly, exports are discouraged because inflation makes them costly and people are
forced to import goods because of high prices in domestic markets. Hence there is an adverse effect
on balance of payments due to inflation. Thirdly due to high inflation money value quickly falls and
people have less motivation to save .
• Unemployment
An expansionary monetary policy decreases unemployment as a higher money supply and attractive
interest rates stimulate business activities and expansion of the job market.
INSTRUMENTS OF MONETARY
POLICY
• Bank Rate Policy:
The Bank Rate Policy is a very important technique used in the monetary policy for influencing the
volume or the quantity of the credit in a country. The bank rate refers to rate at which the central
bank (i.e., RBI) rediscounts bills and prepares of commercial banks or provides advance to
commercial banks against approved securities. It is "the standard rate at which the bank is prepared
to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the RBI
Act".
• Open Market Operation (OMO):
The open market operation refers to the purchase and/or sale of short term and long-term securities
by the RBI in the open market. This is very effective and popular instrument of the monetary policy.
The OMO is used to wipe out shortage of money in the money market, to influence the term and
structure of the interest rate and to stabilize the market for government securities, etc.
• Variations in the Reserve Ratios
Cash Reserve Ratio (CRR): It is defined as that portion of total deposits which a commercial bank
is required to keep with the RBI in the form of cash reserves.
Statutory Liquidity Ratio (SLR): It is defined as that portion of total deposits which a commercial
bank has to keep with itself in the form of liquid assets.
QUALITATIVE METHODS:
• Fixing Margin Requirements:
When specific part or proportion of loan is not financed or offered by the bank is termed as Margin.
Alternatively, it is that proportion of the loan which borrower need to arrange first before applying
for loan in the bank. The amount of loan is dependent on this margin that means variation in margin
will introduce change in loan amount. This method is employed to ensure the necessary availability
of credit supply for the needy sector and discourage it for other non-essential sectors.
Consumer Credit Regulation:
Under this method, consumer credit supply is regulated through hire-purchase and instalments sale
of consumer goods. Under this method the down payment, instalments amount, loan duration, etc. is
fixed in advance. This can help in checking the credit use and then inflation in a country
Publicity: This is yet another method of selective credit control. Through its Central Bank (RBI)
publishes various reports stating what is good and what is bad in the system. This published
information can help commercial banks to direct credit supply in the desired sectors.
• Credit Rationing: Central Bank fixes credit amount to be granted. Credit is rationed by limiting
the amount available for each commercial bank. This method controls even bill rediscounting. For
certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit.
• Moral Suasion: It implies to pressure exerted by the RBI on the Indian banking system without
any strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining
credit during inflationary periods
• Control through Directives: Under this method the central bank issue frequent directives to
commercial banks. These directives guide commercial banks in framing their lending policy.
• Direct Action: Under this method the RBI can impose an action against a bank. If certain banks
are not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities.
Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to their
capital.
LIMITATIONS OF MONETARY POLICY
• Huge Budgetary Deficits- To control inflation and balance the money supply in the market best
efforts are made by Reserve Bank of India but monetary policy has been unproductive due to
budgetary deficits Of the central government.
• Only Commercial Banks are covered- RBI can control the inflationary pressure caused by
banking finance only because it has control on commercial banks and have no control on other
factors which can cause inflation like goods scarcity and deficit financing.
• Problems in management of Financial Institutions and Banks- Inflation can be controlled by
monetary policy and overall development can be achieved only when there is dedicated and
efficient management of banks and financial institutions.
• Money Market is unorganised-There is an unorganized money market present in the Indian
financial system over which RBI has no control .Hence monetary policy turn out to be less
effectual
• Black Money- Black money generation is a bigger problem of the Indian economy which is not
controllable by RBI. Hence total money supply in the economy is beyond the sphere of RBI and
monetary policy
• Inflation control or price stability- Monetary policy has the major objective to control inflation
or maintenance of price stability. However price stability does not mean totally no changes in the
prices. In a developing country like India certain price level changes or inflation is quiet expected.
Although there may be an adverse effect of the high degree of inflation on the economy.
Assessment Pattern
Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled
Marks
Max. Marks 10 10 6 4 4 4 2 40
15
References
Text book:
• Paul, J. 2018. Business Environment: Text and Cases, 4thEdition, Tata McGraw
Hill, India,
• Cherunilam, F. 2017. Business Environment: Text and Cases.26thEdition,
Himalaya Publishing, India, ISBN: 978-9352733361.
Text book:
• Business Environment, 13th Edition, Pearson Education India, India, ISBN:
9788131731581.
THANK YOU
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