RBI Monetary Policy Final

8/14/2019 RBI Monetary Policy Final

1/28

RBI & its Monetary Policy

07 Cherylann Carvalho

49 Tejas Sura

21 Sneha Kamath

26 Sunil Makhecha

20 Dipti Joshi

19 Abhishek Gohil

18 Bijal Gandhi13 Pratik Dodhia


2/28

Contents

1. The RBI

2. What is Monetary Policy?

3. Instruments of Monetary Policy4. Limitations of Policy

5. Recent Trends

6. The Way Forward


3/28

The Reserve Bank of India

INDIAS CENTRAL BANK History Established in April 1935 , nationalized in 1949

Served as Central Bank of Burma & Pakistan

Operates under the Reserve Bank of India Act, 1934 (IIof 1934)

Management : Central Govt. from time to time can give directions to

the Bank, otherwise the Governor shall also havepowers of general superintendence.

The Governor of the RBI is supported by a Central

Board and 4 regional local boards - Mumbai, Calcutta,Chennai and New Delhi.


4/28

Functions of the RBI

Core functions-Traditional Monetary Authority , Regulator and

supervisor of the Financial system, Managerof Foreign Exchange, Issuer of currency andother Related Functions

Developmental RoleTo support national objectives such as

ensuring orderly growth, Extending theorganized financial sector to all parts of theeconomy, Service to common man.


5/28


6/28

Instruments of MonetaryPolicy

Quantitative/ Traditional Measures

Open Market Operations

Discount Rate or Bank rate

Reserve Requirements

Direct Control Measures

Qualitative Credit Controls

Selective Credit

Moral suasion


7/28

Open Market Operations(OMO)

Purchases & Sale of Government Securities &Treasury Bills

OMO conducted through commercial banks

Supply of Money with the Public

Increase RBI purchases Decrease RBI sells

Supply of and demand for credit RBI purchases increases deposits and cash reserves

of banks supply of and demand for credit increases

RBI sells reduces deposits and cash reserves ofbanks supply of and demand for credit decreases


8/28

Ineffectiveness of OMO

When commercial banks have highliquidity, OMO are ineffective

In Buoyant market, credit demand is

difficult to control through OMO In Depressed market, OMO are

ineffective due to lack of credit demand

Government Debt Instruments are notpopular due to low rate of return. RBIforces commercial banks to buyGovernment Bonds


9/28

Cash Reserve Ratio (CRR)

CRR is the ratio of demand and time liabilitieswhich the commercial banks are required tomaintain in form of cash with Central Bank

Demand Liabilities are payable on demand

Time Liabilities are payable on maturity

Applicable to Scheduled Commercial Banks,Regional Rural Banks, Scheduled State Co-operative Banks.

Cash Reserves are non interest bearing in nature

Currently at 5.75%


10/28

Cash Reserve Ratio (CRR)

Increase in CRR means higher cost of funds andbanks have less funds for investments, moneyis sucked out of circulation and vice versa

Tool for liquidity control thereby curb oninflation, by restricting the banks from lendingmoney

Inflexible system, uniformly applicable to all

banks across all regions irrespective of the sizeand reserve position.


11/28

Statutory LiquidityRequirement (SLR)

SLR refers to the ratio of deposits whichcommercial banks are required to maintain withthem in the form of liquid assets

Liquid Assets - Cash / Gold / Government

Securities Limits

Minimum 25%

Maximum 40%

ObjectivesTo discourage banks to sell liquid assets during

hikes in CRR

To ensure solvency of bank


12/28

Bank Rate / Discount Rate

Rate at which RBI lends money to thecommercial banks

By rediscounting bills of exchange or buying ofeligible securities for purchase

Current Bank Rate : 6%

Objective

To support banks facing shortage of cash reserves

Lender of Last Resort


13/28

Direct Market Controls

Repurchase Agreement - REPO

RBI buys securities from the commercial

An agreement between RBI and the selling

bank to repurchase the same on the due date Leads to expansion of money supply in the

system

Current Rate : 4.75%


14/28


Reverse Repurchase Agreements REVERSE REPO

RBI sells securities to the commercial

An agreement between RBI and the buyingbank to repurchase the same on the due date

Leads to contraction of money supply (M3) inthe system

Current Rate : 3.25%


15/28


Liquidity Adjustment Facility (LAF) Scheme

To help banks manage day to day mismatches

Operated through REPO & Reverse REPO auctions

Transferable Government Securities & Treasury Bills

Conducted on Daily Basis

Minimum Bid Size : Rs. 5 Crores and in multiples thereof


16/28


Market Stabilisation Scheme (MSS)

To absorb excess liquidity for managinglarge and persistent capital inflow

Auction of Securities / Bonds issued by RBI RBI decides the amount, tenure and dated

securities

Communicated through Press Release


17/28

Qualitative ControlTechniques

Techniques aim at regulating the directionand distribution of bank credit to particularsectors/ segments of the economy

according to the needs of time and nationalpriority

2 Types of Qualitative Control Techniques:

Selective credit control methods

Moral Suasion


18/28

Selective Credit ControlMethods

Availability of bank credit to priority or weakersectors

Arises when there is shortage of available credit

to priority or weaker sectors Checks the misuse of borrowing facilities

Helps achieving socially desirable objectives likecontrolling and checking speculative trading and

hoarding of sensitive commodities


19/28

Moral Suasion

Directions given by the central bankto commercial banks in respect oftheir lending and other operations

Due to the unique position of thecentral bank no banks can ignore anyadvice given by the central bank


20/28

Limitations of MonetaryPolicy

The time lag

Inside Lag

Outside Lag

Problem in forecasting

Non-banking financial intermediaries

Underdevelopment of money andcapital markets


21/28

The Year that was .. FY 08-09

Date Bank Rate

Reverse RepoRate

Repo Rate Cash ReserveRatio

StatutoryRequirement Ratio

April 26, 2008 6.00 6.00 7.75 7.75 (+0.25) 25

May 10, 2008 6.00 6.00 7.75 8.00 (+0.25) 25

May 24, 2008 6.00 6.00 7.75 8.25 (+0.25) 25

June 11, 2008 6.00 6.00 8.00 (+0.25) 8.25 25

June 25, 2008 6.00 6.00 8.50 (+0.50) 8.25 25

July 5, 2008 6.00 6.00 8.50 8.50 (+0.25) 25

July 19, 2008 6.00 6.00 8.50 8.75 (+0.25) 25

October 11, 2008 6.00 6.00 8.00 (-0.50) 6.50 (-2.25) 25

October 20, 2008 6.00 6.00 8.00 6.50 25

October 25, 2008 6.00 6.00 8.00 6.00 (-0.50) 25

November 03, 2008 6.00 6.00 7.50 (-0.50) 6.00 25

November 08, 2008 6.00 6.00 7.50 5.50 (-0.50) 24 (-1.00)

December 08, 2008 6.00 5.00 (-1.00) 6.50 (-1.00) 5.50 24

January 05,2009 6.00 4.00 (-1.00) 5.50 (-1.00) 5.50 24

January 17,2009 6.00 4.00 5.50 5.00 (-0.50) 24

March 05,2009 6.00 3.50 (-0.50 5.00 (-0.50) 5.00 24


22/28


The cash reserve ratio (CRR) was reduced from 9per cent (September 2008) to 5 per cent by early

January 2009 injecting nearly Rs.1,60,000 crore ofprimary liquidity in the system.

Fresh issuances under MSS were stopped andbuyback of existing MSS securities was alsoresorted to to inject liquidity into the system.

Other measures taken by the Reserve Bank inresponse to the global financial crisis include cut

in the statutory liquidity ratio (SLR).


23/28


The policy rates were also cut - the repo rate by 400basis points from 9.00 per cent to 5.00 per cent andthe reverse repo rate by 250 basis points from 6.00 percent to 3.50 per cent.

Opening of new refinancing windows, refinance to

SIDBI and EXIM Banks, and clawing back of prudentialnorms in regard to provisioning and risk weights.

The measures to improve forex liquidity includedincrease in interest rate ceilings on non-residentdeposits, and easing of restrictions on externalcommercial borrowings and on short-term trade

credits.


24/28

Year of Consolidation .. FY09-10

Date BankRate

Reverse RepoRate

Repo Rate Cash ReserveRatio

StatutoryLiquidity

Requirement

April 21,2009 6.00 3.25 (-0.25) 4.75 (-0.25) 5.00 24

October 27,2009 6.00 3.25 4.75 5 25

January 29,2010 6.00 3.25 4.75 5.75 (+0.75) 25


25/28


The following measures constitute the first phase of exit:

The statutory liquidity ratio (SLR), which was reduced from 25per cent of demand and time liabilities to 24 per cent, isbeing restored to 25 per cent.

The limit for export credit refinance facility, which was raisedto 50 per cent of eligible outstanding export credit, is beingreturned to the pre-crisis level of 15 per cent.

The two unconventional refinance facilities:1. special refinance facility for scheduled commercial banks; and2. special term repo facility for scheduled commercial banks [for

funding to mutual funds (MFs), non-banking financial companies(NBFCs), and housing finance companies (HFCs)] are being

discontinued with immediate effect.


26/28


The cash reserve ratio (CRR) ofscheduled banks has been increased by75 basis points in two stages from 5.0 percent to 5.75 per cent of their net demandand time liabilities (NDTL). As a result ofthe CRR increase, about Rs.36,000 croreof excess liquidity will be absorbed fromthe system.

The policy rates, both the repo rate andthe reverse repo rate have been retainedat their current levels.


27/28

The Way Forward


28/28

The Way Forward

The stance of monetary policy for theremaining period of 2009-10 will be as follows: Anchor inflation expectations and keep a vigil on

the trends in inflation and be prepared to respondswiftly and effectively through policy adjustments

as warranted. Actively manage liquidity to ensure that credit

demands of productive sectors are adequately metconsistent with price stability.

To maintain an interest rate environment consistent

with price stability and financial stability, and insupport of the growth process.

RBI Monetary Policy Final

Documents

Transcript of RBI Monetary Policy Final