Monetary measures by RBI

&

it’s effectiveness …

WHAT IS CENTRAL BANK…?

It is the apex institution of monetary system of a country. It is banker to other banks and to government, it issues notes, controls monetary supply and credit, and maintains monetary stability.

ORGANISATION STRUCTURE

GOVERNOR

4 DEPUTY GOVERNORS

4 LOCAL BOARD OF DIRECTORS

15 DIRECTORS (NOMINATED BY

CENTRAL GOVERNMENT)

Y.V.REDDY

What is recession…?• An economy which grows over a period of time tends to

slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years.

• A recession normally takes place when consumers lose confidence in the growth of the economy and spend less.

• This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment.

• Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment.

What is monetary policy…? It is concerned with the changing the supply of money stock and

rate of interest for the purpose of stabilizing the economy at full employment or potential output level by influencing the level of aggregate demand.

At times of recession monetary policy involves the adoption of some monetary tools which tends to increase the money supply and lower interest rate so as to stimulate aggregate demand in the economy.

At the time of inflation monetary policy seeks to contract aggregate spending by tightening the money supply or raising the rate of return.

Objectives of monetary Objectives of monetary policy…policy…

• To ensure the economic stability at full employment or potential level of output.

• To achieve price stability by controlling inflation and deflation.

• To promote and encourage economic growth in the economy.

TYPES OF MONETARY POLICY

Cheap money policy : Followed in periods of slums & depression.

Dear money policy: Followed in periods of boom & inflation.

Tools of monetary policyTools of monetary policy

Bank reserves policy Bank reserves policy

Open market operationsOpen market operations

Liquid adjustment facilityLiquid adjustment facility

Market stabilization schemeMarket stabilization scheme

Bank reserves policy• Cash reserve Ratio (CRR) is the amount of funds that the

banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

• The increase in the cash rate leads to the contraction of credit only when the banks excess reserves.

• The decrease in the cash rate leads to the expansion of credit and banks tends to make more available to borrowers.

Open market operations…

• It means the purchase and sale of securities by central bank of the country.

• It is useful for the developed countries.

• The sale of security by the central bank leads to contraction of credit and purchase there of to credit expansion.

Liquidity Adjustment Facility…• A tool used in monetary policy that allows banks to

borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

• Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control. Various banks will use eligible securities as collateral through a repo agreement and will use the funds to alleviate their short-term requirements, thus remaining stable.

Expansionary monetary policyProblem: Recession and unemployment Measures: (1) Central bank buys securities through open market operation (2) It reduces cash reserves ratio (3) It lowers the bank rate  Money supply increases   Investment increases  Aggregate demand increases  Aggregate output increases by a multiple of the increase in investment

RBI’s measures during III QUARTER OF 2008-09

Key ratesKey rates Apr

2008 Jul2008

Currentrates

CRR 8.25 9 5

Repo Rate 7.5 9 5

Reverse Repo

6 6 3.5

Bank Rate 6 6 6

Trends in key policy rates

Effectiveness• Prevented the recession…

• Recession in the economy is just the psychological trauma…

• RBI failed to shift the aggregate demand curve upward…

Our suggestions…Government to increase the aggregate

demand should supply the money to common people and not to banks.

By increasing government spendings.By innovative ideas.By forcing the banks to reduce basic loans.By reducing tax (fiscal measure).

Conclusion…

To fight the recession effectively government and RBI should come together with a combo package of monetary and fiscal measures.

Any Questions…?

THANK YOU…Presented By

Bhavna Fatehchandani

Rekha Rawat Samruddhi Khale