2. Presentation Agenda Introduction Monetary Policy of India
Major Operations Open Market Operations Cash Reserve Ratio
Statutory Liquidity Ratio Bank Rate Policy Credit Ceiling Moral
Suasion Marginal Standing Facility Repo Rate Reverse Repo Rate
Urjit R.Patel Committee Report Conclusion 2Monetary Policy
3. Introduction Management of expectations. Relationship
between the rates of interest in an economy and the total supply of
money. A policy is referred to as contractionary if it reduces the
size of the money supply or increases it only slowly, or if it
raises the interest rate. An expansionary policy increases the size
of the money supply more rapidly, or decreases the interest rate.
Usually, the short term goal of open market operations is to
achieve a specific short term interest rate target. For example, in
the case of the USA the Federal Reserve targets the federal funds
rate. 3Monetary Policy
4. Monetary Policy of India The central monetary authority is
the Reserve Bank of India (RBI). It is so designed as to maintain
the price stability in the economy. Other objectives of the
monetary policy of India, as stated by RBI, are: Controlled
Expansion Of Bank Credit. Promotion of Fixed Investment.
Restriction of Inventories. Promotion of Exports and Food
Procurement Operations. Desired Distribution of Credit. Equitable
Distribution of Credit. To Promote Efficiency. Reducing the
Rigidity. 4Monetary Policy
5. Major Operations Monetary operations involve monetary
techniques which operate on monetary magnitudes such as money
supply, interest rates and availability of credit aimed to maintain
Price Stability, Stable exchange rate, Healthy Balance of Payment,
Financial stability, Economic growth. 5Monetary Policy
6. Open Market Operations Involves buying or selling of
government securities from or to the public and banks. The RBI
sells government securities to contract the flow of credit and buys
government securities to increase credit flow. It makes bank rate
policy effective and maintains stability in government securities
market. 6Monetary Policy
7. Cash Reserve Ratio It is a certain percentage of bank
deposits which banks are required to keep with RBI in the form of
reserves or balances. Higher the CRR with the RBI lower will be the
liquidity in the system and vice- versa. As per the suggestion by
the Narshimam committee Report the CRR was reduced from 15% in the
1990 to 5 percent in 2002. 7Monetary Policy
8. 8Monetary Policy
9. Period CRR April 1, 2011 Jan 27, 2012 6.00 % Feb. 03, 2012
Mar. 09, 2012 5.50 % Mar. 16, 2012 Sep. 21, 2012 4.75 % Sep. 28,
2012 Nov. 2, 2012 4.50 % Nov. 9, 2012 Feb. 08, 2013 4.25 % Feb. 15,
2013 Till Date 4.00 % 9Monetary Policy
10. Statutory Liquidity Ratio Every financial institution has
to maintain a certain quantity of liquid assets with themselves at
any point of time of their total demand and time liabilities. These
assets can be cash, precious metals, approved securities like bonds
etc. There was a reduction of SLR from 38.5% to 25% because of the
suggestion by Narshimam Committee. 10Monetary Policy
11. 11Monetary Policy
12. Period SLR April 1, 2011 Aug. 10, 2012 24.00 % Aug. 17,
2012 Till Date 23.00 % 12Monetary Policy
13. Bank Rate Policy Increase in Bank Rate increases the cost
of borrowing by commercial banks which results into the reduction
in credit volume to the banks and hence declines the supply of
money. This banking system involves commercial and co-operative
banks, Industrial Development Bank of India, EXIM Bank, and other
approved financial institutes. The bank rate, also known as the
discount rate, is the rate of interest charged by the RBI for
providing funds or loans to the banking system. 13Monetary
Policy
14. Current Bank Rate 9.00 % 14Monetary Policy
15. Credit Ceiling RBI issues prior information or direction
that loans to the commercial banks will be given up to a certain
limit. Commercial bank will be tight in advancing loans to the
public. They will allocate loans to limited sectors. Few example of
ceiling are agriculture sector advances, priority sector lending.
15Monetary Policy
16. Moral Suasion Just as a request by the RBI to the
commercial banks to take so and so action and measures in so and so
trend of the economy. RBI may request commercial banks not to give
loans for unproductive purpose which does not add to economic
growth but increases inflation. 16Monetary Policy
17. Marginal Standing Facility It refers to the rate at which
the scheduled banks can borrow funds overnight from RBI against
government securities. MSF is a very short term borrowing scheme
for scheduled commercial banks. Banks may borrow funds through MSF
during severe cash shortage or acute shortage of liquidity. Under
MSF, banks can borrow funds overnight up to 1% (100 basis points)
of their net demand and time liabilities (NDTL) i.e. 1% of the
aggregate deposits and other liabilities of the banks. Hiking MSF
rate makes borrowing expensive for a bank which means loans become
expensive for individual and corporate borrowers and this in turn
translates to lesser availability of the rupee. 17Monetary
Policy
19. Repo Rate It is the rate at which RBI lends to the
commercial banks generally against government securities. Banks
borrow funds to meet the gap between the demand they are facing for
money (loans) and how much they have on hand to lend. Reduction in
Repo rate helps the commercial banks to get money at a cheaper rate
and increase in Repo rate discourages the commercial banks to get
money as the rate increases and becomes expensive. 19Monetary
Policy
20. Period Repo Rate April 1, 2011 April 29, 2011 6.75 % May
06, 2011 June 10, 2011 7.25 % June 17, 2011 Jul. 22, 2011 7.50 %
Jul. 29, 2011 Sep. 09, 2011 8.00 % Sep. 16, 2011 Oct. 21, 2011 8.25
% Oct. 28, 2011 April 13, 2012 8.50 % April 20, 2012 Jan. 25, 2013
8.00 % Feb. 01, 2013 Mar. 15, 2013 7.75 % Mar. 22, 2013 April 26,
2013 7.50 % May 03, 2013 Sep. 13, 2013 7.25 % Sep. 20, 2013 Oct.
25, 2013 7.50 % Nov. 01, 2013 Jan. 24, 2014 7.75 % 20 Monetary
Policy
21. CRR & Repo Rate 21Monetary Policy
22. Reverse Repo Rate If banks have excess amount with them,
they can park the surplus money with RBI and earn interest on this.
The interest on such amount is called Reverse Repo Rate. RBI will
increase this rate if it wants to reduce liquidity in the system as
banks will be tempted to park money with RBI rather than lending,
if this rate is high. Current Reverse Repo Rate 7.00 % 22Monetary
Policy
23. Urjit R.Patel Committee Report It has proposed a new
framework for the monetary policy. It targets Consumer Price Index
as the key measure of inflation. The RBI has adopted it recently.
Monetary Policy 23
24. Conclusion Monetary Policy is one of the important tools
that an economy uses to maintain stability. But monetary policy
alone is not enough. Equally effective Fiscal Policy has to be in
place to get the maximum out of the economy. 24Monetary Policy