Transcript
THANK YOU
MONETARY POLICY OF RBI
BY : VINISHA CHANDIL
MONETARY POLICY
Regulation of supply of Money and Cost and Availability of Credit in the economy.
Variables affected by Monetary Policy in the
economy
Interest RatesLiquidityCredit AvailabilityExchange Rates
Purpose of Monetary Policy Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth.
FISCAL POLICY
Use of “Government Expenditure”, and “taxation” to manage the economy.
Variables affected by Fiscal Policy in the economy
Aggregate demand and the level of economic activity The pattern of resource allocationThe distribution of income.
Purpose of Fiscal Policy Stabilise economic growth, avoiding the boom and bust economic cycle
How is the Monetary Policy different from the
Fiscal Policy?
MONETARY POLICY FISCAL POLICY
• Regulates the supply of money.
• Regulates the cost and availability of credit in the
economy.•Deals with both the
lending and borrowing rates of interest for commercial banks.
•Aims to maintain price stability, full employment
and economic growth.
•Defined as a deliberate change in government
revenue and expenditure to influence the level of
national output and prices.
•Broader tool with the government .
•Used to overcome recession and control
inflation.
6Monetary Policy
ABOUT MONETARY POLICY
It is a process by which the monetary authority of a country controls
the supply of money, often targeting a rate of interest for the
purpose of promoting economic growth and stability.
In INDIA, RBI was established on April 1,1935 with the provisionof Reserve bank of India Act .
RBI controls the monetary policy. It is announced twice a year,
through which RBI, regulate the price stability for the economy.
1.Slack season policy April-September
2.Busy season policy October-March
GOAL OF MONETARY POLICY To maintain relatively stable Prices and Low
unemployment
OBJECTIVES
Rapid Economic Growth
Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
FORMS OF MONETARY POLICY
Expansionary policy Increases the total supply of money
in the economy rapidly
Contractionary policy Decreases the total money
supply, or increases it slowly
Expansionary policyis used to combat unemployment
in a recession by lowering Interest Rates .
Contractionary policy involves raising interest rates
to combat inflation.
ELEMENTS OF MONETARY
POLICY
QUANTITATIVE
MEASURES
QUALITATIVE
MEASURES
• Bank rate
• Open market
operations
• Cash reserve ratio
(CRR)
• Statutory liquidity
ratio (SLR)
• Rationing of credit
• Moral Suasion
• Direct Action
• Regulation in
consumer credit
• Marginal standing
facility(MSF)
BANK RATE POLICY
• Bank rate is the
minimum rate at which
the Central bank provides
loans to the commercial
banks. It is also called the
Discount rate.
• The bank rate has been
12.00% in 1991
8.75% in 2013
8.75% in 2015
Dear money policy
Bank rate
interest rate
borrowing will be less profitable
results contraction
of credit
Near money policy
Bank rate
interest rate
borrowing will be more profitable
results expansion of
credit
BANK RATE• Bank Rate is a tool, which central
bank uses for short-term purposes.
• Funds are provided either through lending directly or rediscounting or buying money market instruments like commercial bills and treasury bills.
• 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 any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI.
OPEN MARKET OPERATIONS An open market operation is an instruments of monetary
policy which involves buying or selling of
government securities from or to the public and banks.
This mechanism influences the reserve position of the
banks, yield on government securities and cost of bank
credit.
• The RBI sells government securities to contract the flow of
credit and buys government securities to increase credit
flow.
Open market operation makes bank rate policy effective and
maintains stability in government securities market.
OMO’s TOOL
REPO RATE REVERSE REPO RATE
Repo rate is the rate at which RBI lends to commercial banks generally against
government securities
Reverse Repo rate is the rate at which RBI
borrows money from the commercial banks
Tightening of the policy
The repo rate is 7.75 % The reverse repo rate is 6.75%.
Reverse Repo Rate
LOAN TAKER
=RBI
Repo Rate
LOAN TAKER
= BANK
REPO RATE IS ALWAYS HIGHER
THAN
REVERSE REPO RATE
CASH RESERVE RATIO
It is the percentage of total deposit in which CommercialBanks are required to maintain in the form of cash reserves.
When the RBI feels that the money supply is increasing andcausing an upward pressure on inflation, the RBI has the optionof increasing the CRR thereby reducing the deposits availablewith banks to make loans and hence reducing the moneysupply and inflation.
• Increase in CRR means that banks have less funds available and money is sucked out of circulation.
• Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.
STATUTORY LIQUID RATIO
Every financial institution has to maintain/invest a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities before providing credits to its customer.
These assets can be cash, precious metals, approved securities like bonds etc. The current SLR is 21.50%.
CREDIT RATIONING
It refers to the situation where lenders limit the supply of additionalcredit to borrowers who demand funds, even if the latter are willingto pay higher interest rates.
Minimum of “Capital : Total Assets” (ratio between capital and totalasset) can also be prescribed by Reserve Bank of India.
Generally two measures are adopted:
Imposition of upper limits on the credit available to welldeveloped industries and large scale firms.
Charging a higher or progressive interest rate on bank loansbeyond a certain limit.
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.
21Monetary Policy
DIRECT CONTROL
This method is adopted when a commercial bank does notco-operate the central bank in achieving its desirableobjectives.
It is used as a last resort in case other methods prove
ineffective.
In this method the monetary authorities with clear directive to
carry out their lending activity in a specified manner.
Most of the consumer durables like T.V., Refrigerator, Motorcar, etc. are available on
installment basis.
If there is excess demand for certain consumer durables leading to their high prices, central bank can reduce consumer credit by (a) increasing down payment, and (b) reducing the number of installments of repayment of such credit.
Regulation in Consumer Credit
CHANGE IN LENDING MARGINS
MARGINAL REQUIREMENTS
It is the gap between the value of the mortgaged property and the
amount advanced. RBI increases lending margins to decrease
bank credit.
Marginal Requirement of loan = current value of security
offered for loan-value of loans granted.
The marginal requirement is increased for those business
activities, the flow of whose credit is to be restricted in the
economy.
E.g.- A person mortgages his property worth Rs. 1,00,000
against loan.
The bank will give loan of Rs. 80,000 only.
The marginal requirement here is 20%.
In case the flow of credit has to be increased, the marginal
requirement will be lowered.
RBI has been using this method since 1956.
• Inflation refers to a persistent rise in pricesInflation
• Total volume of money circulating in the economyMoney Supply
• Minimum rate at which the central bank provides loans to commercial banksBank Rate
• Amount of money that banks must set aside with RBI against their depositsCash Reserve Ratio (CRR)
• Percentage of bank funds to be maintained in government and approved securities
Statutory Liquidity Ratio (SLR)
• Rate at which RBI lends to other banks against government securitiesRepo Rate
• Rate at which RBI borrows from other banksReverse Repo Rate
• Capacity of bank meeting the time liabilities and other riskCapital Adequacy Ratio
(CAR)
• Purchase and sale of securities in the open marketOpen Market Operations
(OMO)
MONETARY POLICY – TERMINOLOGY
• 8.75% (w.e.f. 15 Jan 2015)Bank Rate
• 4.00% (w.e.f. 9 Feb 2013)CRR
• 21.50% (w.e.f. 7 Feb 2015)SLR
• 7.75% (w.e.f. 15 Jan 2015)Repo Rate
• 6.75% (w.e.f. 28 Jan 2015)Reverse Repo
Rate
• 8.75% (w.e.f. 15 Jan 2015)Marginal (MSF)
CURRENT RATES
THANK YOU
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