Monetory Policy in india
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Transcript of Monetory Policy in india
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MONITORY POLICY OFRBI
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Money Definition & Function
Money is Often confused between Income or WealthEarning of a person is his/her income. Money is used tomake payment of income.Money is not a saving or wealth but just a medium in whichthese are retained.Money is commonly defined by the functions attached to itthat it is
a commodityor a token
that can act as;® Medium of exchange® Unit of account® Store of value® And Standard of deferred payment
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Money Function
Functions ofMoney
PrimaryFunctions
Secondary
Functions
Medium of ExchangeUnit of Account
Store of Value
Standard ofDeferred payment
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Demand for Money
Motives of holding Money
Transaction
Precautionary Speculative
Positivelyrelated to realincome & PriceLevel
With theincrease inIndividualsincome or pricesof goods/services shoots
Positivelyrelated to realincome & PriceLevelMoney is heldfor coveringunexpectedexpenditure andcontingencies
Asset Demandfor Money
Store of value
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Supply of Money
Money supply classification ofsectors
Money creating
sector
Money using
sector
Government
CentralBank
Household
Non financialEnterprises
Financial
Enterprisesother thanbanks
Rest of theworld
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Measurement of Money
M1: Currency Notes +Coins +DemandDepositsM2 : M1+ Post officeSaving DepositsM3 : M1+ Time Depositsof all commercial &cooperative BanksM4 : M3 + Total Depositwith the post officesaving organization
NM1 Demand deposits withthe banking system + ‘Other’ deposits with the RBI.(Narrow Money)NM2 : NM 1+ Short-term timedeposits of resident + CD’s (Intermediate Monetary
Aggregate)
NM3: NM2 of residents +LongTerm deposits of resident+Call/Term funding fromfinancial institutions. (BroadMoney)
OLD NEW
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Liquidity Indicator
L1 = NM3+ All deposits with the post officesaving banks ( excluding National savingcertificate).
L2 = L1+ Term deposits with term lendinginstitutions and refinancing institutions (FI’s) +Term borrowing by FI’s + Certificate of depositissued by FI’s L3 = L2 + Public deposits of non bankingfinancial companies
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Monetary Policy of RBI
It is a regulatory policy by which RBImaintain its control over the supply of
money for the realization of generaleconomic goals.It is a policy that manages the supply
of money and addresses the demandside of the commodity market in aneconomy.
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What is Monetary Policy
These factors include – › Money supply› Interest Rates, and› Inflation.Through which RBI seeks to ensure∞ Price stability,∞ Economic growth.∞ Full employment
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Objective of Monetary Policy
Objectives of MonetaryPolicy
PriceStability
Credit Availability
FinancialStability
ExchangeRateStability
EconomicGrowth
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Types of Monetary Policy
Expansionary Monetary Policy Aims at encouraging spending on goods & services by expanding
supply of credit and money by lowering the policy rates, loweringthe reserve requirements & purchasing the government securitiesin the market.
Contractionary (Tight) Monetary Policy Aims at preventing inflation by contracting the money
supply which is achieved by increasing policy rates,reserve requirements and selling the governmentsecurities in the market.
Countercyclical Monetary Policy Aims at moderating the cyclical fluctuations in the
economy and stabilizing the economy around its trendpath by following countercyclical measures.
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Inflation:
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Monetary Policy v/s FiscalPolicy
1. The Monetary Policyregulates the supply of
money and the cost andavailability of credit in theeconomy.
2. Aims at controlling theinflation.
3. Its control over the supplyof money & reduceinflationary pressure inthe economy
1. Deliberate changes
in Govt. revenues &expenditure2. Aims at full & price
level stability.3. Can be used to
overcome therecession & controlinflation
Monetary Policy Fiscal Policy
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Interest Rates:
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for theuse of the assets.
a) risk of principal loss, called credit risk ; andb) forgoing other investments that could have been
made with the loaned asset
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Real interest rate
An interest rate that has been adjusted toremove the effects of inflation to reflect the realcost of funds to the borrower, and the real yield
to the lender.Real Interest Rate = Nominal Interest Rate -Inflation (Expected or Actual)
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BPS
A basis point is a unit of measure used infinance to describe the percentage change inthe value or rate of a financial instrument.
indicate changes in rate of interest and otherfinancial instruments1 basis point is equal to 0.01%
when we say that repo rate has beenincreased by 25 bps, it means that the rate hasbeen increased by 0.25%.
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Bank Rate – Discount Rate
It is the rate of interest which acentral bank charges on the loansand advances that it extends tocommercial banks and otherfinancial intermediaries without anysale of securitiesIt is generally for a longer period oftime. BR FBR CR M S
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Cash Reserve Ratio
Banks in India are required to hold acertain proportion of their deposits in theform of cash.However, actually Banks don’t hold theseas cash with themselves, but deposit suchcase with Reserve Bank of India (RBI). CRR RR ER CR Ms
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SLR (Statutory Liquidity Ratio)
The minimum percentage of deposits thatthe bank has to maintain in form of gold,cash or other approved securities . Thus,we can say that it is ratio of cash andsome other approved securities toliabilities (deposits).
SLR RR ER CRMs
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LAF
LAF is a monetary policy tool which allows banks toborrow money through repurchase agreements1998 Narsminam Committee on banking rector reforms,recommends LAF2000 RBI introduces full-fledged LAF.LAF helps banks to quickly borrow money incase of anyemergency or for adjusting in their SLR/CRRrequirementsUnder LAF, RBI auctions Government securities, startingat the repo and reverse repo rate.Minimum bidding amount is Rs.5 crore.
In LAF, money transaction is done via RTGS. So in this’
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Open Market Operations
Outright
GS BR CR Ms
Types of Open MarketOperations
Outrigh
t
Repo
Sale and Purchaseof governmentsecurities
Sale and Purchase ofgovernment securities with anagreement to buyback or resell
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Repo / Reverse Repo
Sale SecuritiesReceives Funds
Purchase SecuritiesPays Funds
RBI
RepurchaseSecurities
Payback Funds
Returns Securities
Gets Back Funds
RepoMarket
Banks
Reverse Repo
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Repo Rate – Repurchase RateReverse Repo Rate
It is the rate at which banks borrow moneyfrom the central bank for short period byselling their securities (financial assets) tothe central bank with an agreement torepurchase it at a future date atpredetermined price .
Repo absorbed liquidity REPO IR RR ERMs
Reverse repo injected liquidity
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Bank Rate v/s Repo Rate
Bank rate is the rate
at which banksborrow money fromthe central bankwithout any sale ofsecurities.It is generally for alonger period oftime
Repo rate or
repurchase rate isthe rate at whichbanks borrowmoney from thecentral bank byselling theirsecurities.It is generally for a
short period of
Bank Rate Repo Rate
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Marginal standing Facility
Effective from 9 th May 2011Policy Statement:
The stance of monetary policy is, among otherthings, to manage liquidity to ensure that itremain broadly in balance with neither a largesurplus diluting monetary transmission nor a
large deficit choking off fund flows.Introduce to sterilize the impact of large foreigncapital flow
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Marginal Standing FacilityRate
Under this scheme, Banks will be able toborrow up to 2% of their respective NetDemand and Time Liabilities ― The rate of interest on the amountaccessed from this facility will be 300basis points (i.e. 3%) above the repo ratewef 15/07/2013This scheme is likely to reduce volatility inthe overnight rates and improve monetary
transmission.
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Bank Rate 10.25% (w.e.f.15/07/2013
Increased from 8.25%which was continuing
since 03/05/2013
CRR 4.00% (wef 09/02/2013)-announced on29/01/2013
Decreased from4.25%which wascontinuing since
30/10/2012
SLR 23%(w.e.f. 11/08/2012)(announced on
31/07/2012)
Decreased from 24%which was continuing
since 18/12/2010Repo Rate under LAF 7.25% (w.e.f.03/05/2013) Decreased from 7.50%
which was continuingsince 19/03/2013
Rev Repo under LAF 6.25% (w.e.f. 03/05/2013 Decreased from 6.50%which was continuing
since 19/03/2013
Marginal StandingFacility (MSF)
10.25% (w.e.f.15/07/2013)
Increased from 8.25%which was continuing
since 03/05/2013
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A Stylized Central Bank BalanceSheet
1. Paid up capital
2. Reserves3. Currency4. Banks deposits
with central Bank5. Government
Deposits6. Other liabilities
1. Loans & AdvancesGovernmentBanksOthers
2. InvestmentGovernment Securities
Foreign assets3. Gold4. Other assets
Liabilities Assets
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Bank Behavior MIS
Profit
Maximization
Constrained Profit Maximization
Investment tatpay High
Interest Rate &is Default Free
Investment insome Liquid
Securities evenwith some what
lower return
RegulatoryConstraint
LiquidityConstraint
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A stylized Balance Sheet ofCommercial Bank
Monetary LiabilitiesDemand DepositsFixed DepositsBorrowingsNon MonetaryLiabilitiesPaid UP CapitalReservesOther Liabilities
Financial AssetsNon earning Assets
(Reserves)Cash in handDeposit with central bank
Earning AssetsCredit To Govt.Credit to Pvt SectorOther Investment
Physical Assets
Liabilities Assets
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RISK MANAGEMENT
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Risk and Return
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Essential components of riskmanagement
Management of Risk Identify all areas of risk Evaluate/Assessment of these risks Prioritization of risks Set various exposure limits for different typeof business
Issue clear policy guidelines / directives.Measures to mitigate it.
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Value at Risk (VaR)
Traded Market Risk Calculated using Value atRisk (VaR) methodology.1. Generation of management Information &
oversight,2. setting up of limits and triggers,3. Control of trading operations,4. Performance evaluation5. Regulatory reporting & risk oversight
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OPERATIONA L RISK (OR)
Operational risk has been defined by the BaselCommittee on Banking Supervision1―As the risk of loss resulting from
inadequate or failed internal processes,people and systems or from externalevents ”.
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OPERATIONA L RISK (OR)
• People: Internal failure to comply withemployments laws.
• Processes : workplace safety standards, policy
breaches, compliance breaches, key personnelrisks, damage to physical assets, businessdisruptions.
• Systems : system failures, transaction processing
failures, information security breaches and the like.• External factors : external fraud. Eg: robbery,
forgery, earthquake.
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Liqu id i ty Risk
Liquidity risk is the potential inability to meetthe liabilities as they become due.It arises when the banks are unable to
generate cash to cope with a decline indeposits or increase in assets.It originates from the mismatches in the
maturity pattern of assets and liabilities.
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Managing Liquidity Risk
Liquidity-adjusted value at riskLiquidity at risk: A country's liquidity positionunder a range of possible outcomes for
relevant financial variables ( exchange rates,commodity prices, credit spreads, etc. ) isconsidered.Scenario analysis-based contingency
plans: should incorporate events that couldrapidly affect an institution’s liquidity, includingtightening of collateral requirements orother restrictive terms associated with
secured borrowings,
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Risk Managment
Enterprise Risk Governance
Economic Capital
Credit Risk•Credit Assessment
•Credit Analysis•Portfolio analysis
and management
Market Risk•Trading Risk•Interest rate &Currency risk intheBalance Sheet
Funding & Liquidity•Structural Funding &Liquidity Management•Scenario Stress Testing•Crises & Contingencyplanning
Operation Risk•InadequateProcess•Inadequate People•InadequateSystem•External Event
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Why capital is required?
Banks require to maintain capital forthe risk that they carries in the book
Cushion against LossTo satisfy the regulatory minimum.To support future balance sheet
growth
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Risk
Risk: The possibility of the occurrence ofthe event which will result in Loss1. Inability to predict the occurrence2. Undesirable consequences3. Want of banking business
Integral part of banking business: Calculated
Risk
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Basel Accord
Basel I1988Only Credit
Risk
Internationallyoperating
BankCAR 8%
Indian BankCAR 9%
Basel II2004Credit + Market + Operational
Risk
Pillar - I
Pillar - II
Pillar - III
Credit Risk
MarketRisk
OperationalRisk
Basel III2009Quality,
Adequacy,Efficiency
Countercyclical
Provisions
Liquiditycoverage ratio
Net StabilityFunding Ratio
AvoidSystemic
Risks(StreesTesting
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f l
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Major Features of Basel III
A. Better Capital QualityB. Capital Conservation Buffer (Efficiency)C. Countercyclical Buffer (quality)D. Minimum Common Equity and Tier 1 Capital
RequirementsE. Leverage RatioF. Liquidity RatiosG. Systemically Important Financial Institutions
(SIFI)
ompar son o ap ad l d
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p pRequirements under Basel II andBasel III
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T L
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Term Loan:
This credit facility is used to fulfil the long termrequirements of the borrower.The payback period for this facility varies from 3 to 10years.It is also called Secured Loans because the borrowerhas to furnish some security against this loan and thevalue of that security should be greater than or equalsto the loan amount.This credit facility can be used for the followingpurposes: -
Purchase of Plant & Machinery for the organizationPurchase of Land and building for a new or existingprojectsPurchase of other tools or instruments that are fixed innature i.e. furniture & fixtures, vehicles etc.
W ki C i l L
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Working Capital Loan:
For financing temporary requirement of workingcapital, the organization can go for varioussources;a) Spontaneous Sources
I. Trade CreditII. O/S Exp’s
b) Commercial Paperc) Inter Corporate Deposits
d) BanksI. Cash CreditII. OverdraftIII. Bills Purchased / Discounted
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N F d B d L di