Indian Economy

Following role do commercial banks play in implementing

monetary policy:-

1. Interest Rate Transmission: In most countries, the commercial banks lend money and accept deposits at rates that are attached to their country’s central bank rate; borrowers and savers have the influence over the amount they are willing to borrow or save within the economy.

2. Credit Availability: With regard to some policies from the central banks, commercial banks regulate credit supply in businesses and consumers by changing their lending policies.

3. Open Market Operations (OMOs): The holders of OMOs are the commercial banks, shareholder deposits commercial banks are in the buying and selling government securities that have repercussions in the liquidity of the banking sector.

4. Reserve Requirements: All the commercial banks together should maintain the balance through reserves which the Central Bank has provided. Thus, any change in these requirements will determine the range to which the banks can provide money.

5. Money Supply Management: Using money obtained from borrowing, deposits they hold and through managing their required reserves, commercial banks help in realization of other monetary policy objectives as needed, say controlling inflation or boosting growth.

6. Economic Stabilization: Relaying the central bank policies or goals, it’s a responsibility of commercial banks to curb consumption, investments amongst other related economic activities.

Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates.

If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most. This is so because, with lower rates, borrowing becomes cheaper and thus, investors invest more in things like stocks, real estate, and other assets, which, are expected to rise in value. Owners of such assets experience an upward social mobility and a widening of the social disparity. On the other hand, possibly, small investors, who have less money invested, will not immediately notice such advantages.

• Also, regions of expansionary monetary policies open employment opportunities but not all the employment opportunities lower income gap. The dominant employment in high-wage-generating activities like finance or technology industries might expand more than low-wage occupation hence widening the gap in wages.

While the dampening effect of expansionary monetary policy or an increase in the interest rate to tame inflation may prove particularly lethal to lower-income earners, not to mention perhaps restricted credit due to high cost of borrowing, measures put in place to control inflation may slow down job creation, especially in areas where low wage earners work.

In conclusion, monetary policy works in the general economy, and it deepens income and wealth inequality since its winners are the high-income earners while its losers are the low-income earners.

Monetary policy and banking regulations impact the financial market stability in several ways, including:

Interest rates: Monetary policy will have an impact on interest rates because it influences the cost of borrowing for people and businesses. This determines the actual amount of money that people and businesses spend and invest.

Bank balance sheets: This monetary policy can affect the liability side of bank balance sheets.

Risk premiums: Monetary policy may impact the risk premiums in financial markets.

Asset prices: Monetary policy affects the asset prices of a financial system, therefore impacting the stability of the financial system.

Credit losses: Monetary policy impacts the rate of default by firms and therefore impacts credit losses on loans to those firms.

Macroprudential policies: Macroprudential policies are necessary correct imbalances in credit and asset markets.