Kirtan Shah

CONCERNED WITH THE SUPPLY OF MONEY IN THE ECONOMY AND THE COSTS OF BORROWING IT

• Aims at controlling the money supply in the economy to control excess inflation.

• Is implemented through the RBI• Objectives:

a) Stability of employment and pricesb) Economic Growthc) Balance in international payments

REFERS TO THE USE OF GOVERNMENT SPENDING AND TAXING POWER TO ACHIEVE MACROECONOMIC OBJECTIVES

• Economic growth is largely influenced by the fiscal policy

GDP = C + I + G + (X-M)WhereC: Consumption of goods and services by

individuals I: Investment in capital goods by the private

sectorG: Government ExpenditureX: Export ReceiptsM: Import Expenditure

• GDP is used by economists as a measure of economic growth

• SLR is the percentage of NDTl’s (Net Deposits and Time Liabilities) that commercial banks needs to maintain with the RBI in the form of cash or gold or government approved securities.

• Is basically meant to ensure solvency of the bank.

• SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit.

• Generally complied by investing in G-Secs.

• Present SLR rate is 25 %.

• CRR is the percentage of NDTLs (Net Deposits and Time Liabilities) that banks have to keep as cash with the RBI.

• Primary tool to drain out the excessive money from the banks.

• If RBI increases the CRR, the amount available with the banks for lending operations comes down.

• If RBI decides to reduce the CRR, the amount available with the banks for lending operations increases.

• Present rate is 6%

• Commonly known as the Repo Rate.

• It is the rate at which RBI lends to commercial banks.

• It is a short-term measure.

• Hike in Repo Rate makes it expensive for banks to lend.

• Present rate is 5.75%

• Commonly known as the Reverse Repo Rate.

• It is the rate at which RBI borrows from commercial banks.

• It is a short-term measure.

• Hike in Reverse Repo Rate drains out excess liquidity from the market.

• Present rate is 4.50%

London Interbank Offered Rate An interest rate at which banks can borrow

funds from other banks in the London interbank market.

LIBOR is the world's most widely used benchmark for short-term interest rates. 

It is important because it is the rate at which the world's most preferred borrowers are able to borrow money. 

It is also the rate upon which rates for less preferred borrowers are based.

Example: A multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus 4 -5 bps

Mumbai Interbank Offered Rate

An interest rate at which banks can borrow funds from other banks in the Indian interbank market.

1-day, 14-day, 1 month and 3 month MIBORs

Benchmark rate for the call money market.

Benchmark rates for the majority of money market deals made in India

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