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November 2007 MONEY KUMAR AND THE MONETARY POLICY! Financial Education Series www.rbi.org.in Hi, I'm Money Kumar. And I work at the Reserve Bank of India. The RBI, you know! Learning about The Monetary Policy! I've got a great job. But people don't know much about what I do. Most think about the RBI as a government organization that's got nothing to do with them. But that's not how it is. Every single thing that I do at the RBI has an impact on the entire country. From the poorest farmer to the richest businessman. As you can guess, it's a very interesting job with many responsibilities. If you want to know more, just sit back, read and enjoy! In a class, the students try hard to understand. ECONOMics . Monetary Policy bility a t S c nomi . Eco . Price Fluctuations . FEMA Hi everybody! I have a surprise for you today. Please welcome Money Kumar! Welcome, Money Kumar! I have invited you to explain the Monetary policy to my class. I've told them about the 3 basic objectives of monetary policy - controlling inflation, encouraging growth & financial stability! All of this is so complicated. Why can't we just have enough money around for everyone and all would be fine! Why not? What’s your problem? Oh no! No way! Alright! Alright! So you think if there is enough money around, it would be just fine? …Let's go for class trip then! He rolls his hand round in a whirl and they reach a whole new world! Welcome to a world where there is money everywhere. Take as much as you want and do whatever you want with it. So tell me, how much money would you need? 500 rupees! We'll buy everything we want! Done! The students enjoy their money The kids queue up to play games. At Rs. 100 a game, it's very affordable! Rs. 100/ But slowly, many other kids join the queue. And as the demand rises, the price does too... Rs.150/ Rs.200/ Rs.300/ What's the point of having money when we cannot do what we want? Some can still afford it. But most can't. Yes, why can't they have more consoles… so that all of us can play? But what about the space? There is hardly any space in this room for all of us to stand, where will they keep more consoles anyway? Money Kumar!!! Money Kumar!!! Money Kumar!!! Why is it that in spite of having loads of money, we cannot afford to do what we want? Why are there not enough things available? That's what happens when there is a lot of money but fewer goods. It's called Inflation! Money Kumar arrives in a flash! When too much money chases too few goods, the prices of goods increase. That's inflation. Though it hurts everybody alike, it hurts the poor the most. Inflation!? Why’s that? Can you not do anything about it? Because, poor people are not protected. They earn their daily livelihood and cannot save enough for a rainy day. Of course I can! Come, I will show you something! He takes them to his control room at the RBI headquarters. As he pushes up the interest rates... This is what we at the RBI do! With the increase in the interest rates, the screen shows rupee flow from banks to the market slowing down as money becomes more expensive and people reduce borrowing from banks. The screen now shows the video-game parlour. The line for the video-game console slowly comes down and so do the ticket prices. Rs. 100 He then also adjusts the other slider so that the excess money from the market gets sucked back into his machine. The RBI cannot stop the price increases completely. But it can ensure that prices do not