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Are R.B.I Policies Suitable For Growth Of Indian Economy?

Reserve Bank Of IndiaThe Central Bank Of India -RBI.

Established In 1935 With a Share Capital Of Rs. 5 crores on the basis of the Hilton Young Commission.

The Share Capital was Divided into Rs. 100 each fully paid up which was entirely owned by private shareholders in the

beginning.

RBI was nationalised in 1949.

The govt. held shares of normal value of Rs. 2,20000.

MonetaryPolicy

FEDERAL RESERVE BANK OF THE U.S.

What is Monetary Policy?

Shaw defines monetary policy as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost.., of money.

Monetary policy is essentially a programme of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving the objectives of general economic policy

Objectives Of Monetary Policy

Maintain price Stability.

Flow of credit to the productive sectors of the economy.

Stability for the national currency.

Growth in employment and income.

To promote and encourage economic growth in the country.

INSTRUMENTS OF MONETARY POLICY

SLR

QUANTITATIVE

Cash Reserve

Ratio

Bank rateOpen marketoperations

Bank Rate policyTraditional approach:- Bank rate

means on which central bank discounts and rediscount the eligible bills.

Today’s approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort. Present rate is 6%.

Effect of Bank rate

Increase in bank rate Decrease in bank rate

Increase in bank rate charge by the central bank on its advance to commercial bank.

Commercial bank increase the rate of interest on their loan.

Demand for the credits and loan decrease.

Flow of the money decrease in the economy

Use in inflationary situation

Decrease in bank rate charge by the central bank on its advance to commercial bank.

Commercial bank decrease the rate of interest on their loan.

Demand for the credits and loan increase.

Flow of the money increase in the economy

Use in depression situation

Open Market operation

Its include the sales and purchase by the central bank of ….

AssetsForeign exchangeGoldGovernment securitiesCompany securities

Use of Open Market operation

In the inflationary situation In the depressionary situation

Central bank decrease the money supply.

Central bank sale out the securities to commercial bank and control money supply.

Central bank increase the money supply.

Central bank purchase the securities from the commercial bank.

Cash Reserve RatioCommercial bank has to keep a

certain percentage of his deposits with central bank.

It control the cash flow in economy.

It keeps changes in monetary policy framed by central bank of a country. Presently it is 6%.

STATUARY LIQUIDITY RATIO

Commercial bank is to keep a certain percentage of his deposit as liquid asset.

It control the cash flow in economy.

It keeps changes in monetary policy framed by central bank of a country. At present it is 24%.

Use of C.R.R. & S.L.R

In Inflationary situation In Depressionary situation

o Increased the percentage of cash reserve ratio and Statutory liquidity ratio

o It reduces the

supply of money in an economy

o Decreased the percentage of cash reserve ratio and

Statutory liquidity ratio

o It increases the supply of money in an economy

Qualitative Instruments

Credit Rationing: Under this two measures are adopted: • Imposition of upper limits on the credit available to large

industries and firms.• Charging a higher interest rate on bank loans beyond a

certain limit.

Change In Lending Margins: The banks provide loans only upto a certain percentage

of the value of the mortgaged property. The gap between the value of the mortgaged property

and amount advanced is called ‘lending margin’.

Moral Suasion:• The moral suasion is a method of persuading and

convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country.

Direct controls:• Where all other methods prove ineffective, the

monetary, authorities resort to direct control measures with clear directive to the banks carry out their lending activity in a specified manner.

Highlights of Monetary Policy 2011-2012The Reserve Bank announces the following

policy measures:

The Bank Rate has been retained at 6.0 percent.

It has been decided to increase the repo rate from 8.25 per cent to 8.50 per cent

The reverse repo rate is increased from 7.25 per cent to 7.50 per cent.

It has been decided to increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent.

The SLR is announced 24%.

Limitations Of Monetary Policy

The time lag :• The first and the most important limitation

in the effective working of monetary policy is the time lag. i.e. time taken in chalking out the policy action, its implementation and working time.

Problem in forecasting :• The formulation of an appropriate monetary

policy requires a reliable assessment of the magnitude of the problem-recession or inflation- as it helps in determining the appropriate policy measures.

Non-banking Financial Intermediaries: • The structural change in the financial market has

also reduced the scope of effectiveness of monetary policy.

Under Development of money and capital markets :

• The effectiveness of monetary policy in less developed countries is reduced considerably because of the underdeveloped character of their capital and money markets.