Monetary Policy

1 Prologue2 What is monetary policyQuantitative Tools1 1 Reserve Ratios (SLR and CRR)2 2 Open Market Operation (OMO)3 3 Policy RateBank Rate1 Liquidity Adjustment facility (LAF)2 LAF Repo Rate3 Marginal Standing facility (MSF)4 Reverse repo Rate5 Repo Rate in recent years434 Monetary Policy limitationsQualitative Tools1 1 Margin Requirements LTV2 2 Consumer credit regulation3 3 Selective credit control4 4 Moral Suasion56 Monetary policy tools Quantiative vs QualitativeAppendix1 1 Why High SLR and High CRR are bad2 2 Narsimhan (I) Committee 19913 3 Narsimhan (II) Committee 199878 Mock QuestionsPrologueNext article is about RBI appointed Urjit Patel Committee on Monetary policy frameworkBut before dwelling into that we must recap the basic concepts of what is monetary policy itstools and limitations Otherwise Urjit wonrsquot make much senseHence in a way this whole article is a prologue to next articleWhy RBI and Why Monetary policyInitially people used barter system for trading But the barter system had many problems (click me(httpmrunalorg201312economy-barter-money-bitcoin-fungibility-double-coincidence-[Banking] Monetary Policy Quantitative amp Qualitative Tools applications amplimitations MSF LAF Repo OMO CRR SLR Revisited before upcoming UrjitArticleExplained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit1 of 29 152015 623 PM

of-wants-division-of-labour-part-1htmlbarter-lim)) Therefore people switched to money systemFinancial intermediates = middlemen who help in the circular 1048627ow of money betweenhouseholds and business 1048627rmsThere are two types of 1048627nancial intermediaries banking institution and non-banking 1048627nancialinstitutionsRBI controls (all) banks and (some) non-banking 1048627nancial institutionsRBIrsquos main job is to control Money supply in this game and thereby 1048627ght in1048627ation and de1048627ationIn1048627ation = price rise = bad for economy you know that by common senseBut De1048627ation = price decrease = we can buy things at a lower price Isnrsquot that good Why isde1048627ation bad for economyAns Every business has lsquo1048627xed cost of productionrsquo say minimum light bill phone bill o1048627ce rentsta1048627 salary etc So if prices keep falling and falling (say of Nano car) then car marker will su1048627erlosses He has no motivation to expand business He wants to cut down his production costs by1048627ring some of the employees= less new jobs created= unemployment = social unrestIf prices of everything fall- then custom duty VAT excise duty service tax- their collection willalso decrease Then government has less money to spend on education healthcare socialsector defense law and order = poverty disease crimeby the wayTERM meaning Does RBI want itDEFLATION fall in the prices (and fall IN employment) NoDISINFLATION Fall in the prices but without causing unemploymentyes (while 1048627ghtingin1048627ation)STAGFLATIONstagnation + in1048627ationprices and wages risebut people canrsquot 1048627nd jobs companies canrsquot 1048627ndcustomersNoREFLATIONpolicy to stop the fall in price levels but without causingrise in the price levels (in1048627ation)yesWhat is monetary policy Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit2 of 29 152015 623 PM

Policy made by the central bankTo control money supply in the economy (and thereby 1048627ght both in1048627ation and de1048627ation)RBI implements monetary policy using certain tools Two typesquantitative tool qualitative toolsLetrsquos start from hereQuantitative Tools1 Reserve Ratios (SLR and CRR)SLR A Bank has to set aside this much money into gold or RBI approved securities 23CRRA Bank has to set aside this much as reserve Bank cannot lend it to anyone Bankearns no interest rate or pro1048627t on this4Reserve ratio SLR CRRSuppose economy is showing in1048627ationary trend Prices of all goods and services are increasingday by dayHow can RBI stop it using Reserve ratio as a toolIn this case RBI should RAISE the reserve ratiosObserveRight nowPeople deposited total this much money in SBI (net demand amp TIMEliabilities NDTL)100 crCRR (4) [SBI has to keep this much cash aside for reserve] -4 crSLR (23) [SBI has to invest this much money in RBI approved securities] -23 crMoney left with SBI100-4-23=73CoresSay RBI raises SRL to 40 and CRR to 15 thenOriginally 100 cr Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit3 of 29 152015 623 PMSLR 40 -40CRR 15 -15Money left with SBI 45 crYou can see when Rajan has raised reserve ratio money with SBI is reduced (from 73 crores to just45 crores)What will be its implicationImagine yoursquore a money lender Yoursquove 100 crore rupees and you must make Rs1 crore pro1048627t ina yearObviously you should lend it 1 interest rate (because 1 of 100 crore = 1 crore)

But what if yoursquove only 2 crore rupees and you still want to make Rs1 croer pro1048627t in a yearNow you must lend it 50 interest rate (because 50 of 2 cores = 1 crore)Observe that as money decreased (from 100 to 2) loan interest rate increased (from 1 to 50)Same happens when SBI is left with less money (after RBI increases reserve ratio)Letrsquos prepare a 1048627ow chartSituation Economy has in1048627ationary trend Prices of goods and services increasing every daySolution RBI raised reserve ratio (CRR SLR)Result SBI is left with less money to lendConsequences1 SBI raises its loan interest rate2 Businessmen borrow less money from SBI3 Businessmen donot start new business Donot expand existing businessResult=Less jobs Even existing employees discharged If anyone remains in the job he doesnrsquotget pay raise He starts cutting down unnecessary expenditure (eg buying two newspapersgetting his shirts ironed drinking tea 4PM in o1048627ce and so on Thus even paper-wall dhobichai-walla- everyonersquos income reduced)45 Result= Less income (Because of above reasons)6 Result= Less demand of goods and services (because less income)7 Ultimately shopkeeper will bring down the prices to attract people into buying more things Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit4 of 29 152015 623 PMThus in1048627ation is reducedYou may doubt- what about supply side bottlenecks what about cost push and demand pullin1048627ation Irsquom not going into all that details at the moment else this article will become longer than1048627ve kilometersLetrsquos just prepare a summary tablePolicy dear money cheap moneyTool To 1048627ght in1048627ation To 1048627ght de1048627ationReserve Ratio (CRR SLR) Increase them Decrease themMoving to the next (Quantitative) tool Under monetary policy2 Open Market Operation (OMO)Open Market Operation= when RBI starts buyingselling government securities to controlmoney supplyGovernment securities= piece of paper It says something like this ldquogive me Rs100 Irsquoll give you

8 interest rate for next ten years and after that Irsquoll repay the principle of Rs100rdquo This is howgovernment borrows from othersSituation Economy has in1048627ationary trend Prices of goods and services increasing every daySolution RBI starts selling government securities in open marketResult SBI buys them and thus SBIrsquos lending money is reduced Wait HowImagine Rajan is selling ldquosabzirdquo (vegetables) If SBIrsquos chairman Arundhati Madam goes to buyvegetables Obviously madamrsquos money will decrease when she buys vegetablesThen same as usual1 SBI left with less money to lend2 SBI raises its loan interest rate (to keep pro1048627t margin same)3 Businessmen borrow less money from SBI4 Businessmen donot start new business Donot expand existing business5 Less jobs6 Less income7 Less demand8 Ultimately shopkeeper will bring down the prices to attract people into buying more things Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit5 of 29 152015 623 PMThus in1048627ation is reducedDuring de1048627ation RBI will do the reverse (ie RBI buys ldquoSabzirdquo from SBI) How will it stop de1048627ationThink in your headLetrsquos update our tablePolicy dear money cheap moneyTool To 1048627ght in1048627ation To 1048627ght de1048627ationReserve Ratio (CRR SLR) Increase them Decrease themOpen Market Operation (OMO) RBI sell securities RBI buy securitiesMock QuestionIn 2013 UPSC walla asked a very chillar question from this topicIn context of Indian Economy lsquoOpen Market Operationrsquo refers toa Borrowing by scheduled banks from RBIb Lending by commercial banks to industries and tradec Purchase and sale of government securities by the RBId None of AboveWhenever you face a GSGK type MCQ Yoursquove three choicesSkip If you donrsquot know the answer Just leave it instead of risking negative markAttempt Correct answer is Opt CMark nReviewIt means yoursquove unsure of the answer 5050 So you mark the question number (say

45) at the back of your question paper At the end of exam if yoursquore left with 10-15free minutes You look at the question again and try to solve itSo should you put above question in ldquomark n reviewrdquoNoBecause itrsquos a de1048627nition based question If you donrsquot know the de1048627nition of ldquoOMOrdquo you might ticka wrong answer and fail Most of the sincere players fail in prelims because of this reason Theypush their luck in negative marking to overcome an lsquoimaginaryrsquo cuto1048627 and thus dig up their ownExplained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit6 of 29 152015 623 PMgrave (especially during last 10-15 minutes of the exam)Moral of the story never put ldquofactde1048627nitionrdquo type MCQs in Mark-n-ReviewLetrsquos solve a bit more complicated MCQ from 2012rsquos CSAT paperQWhich of the following measures would result in an increase in the money supply in economy1 Purchase of government securities from public by central bank2 Deposit of currency in commercial banks by the public3 Borrowing by government from the central bank4 Sale of government securities to the public by central bankAnswer choicea Only 1b 2 and 4c 1 and 3d 2 3 and 4Whenever you face such multiple statement type MCQs always use ldquoelimination methodrdquo First 1048627nda statement that is de1048627nitely right or de1048627nitely wrong and eliminate choices accordinglyFocus on 1048627rst statement ldquoPurchase of government securities from public by central bankrdquo will itincrease money supply in the systemImagine Rajan puts an ad in newspaper bring your Sabzi (vegetables) Irsquoll buy it Junta gives himtheir own veggies Rajan gives them money (a classic buy and sell)Ultimate result money supply increased in the system- because junta got the money Meaning1 de1048627nitely correctIf you think it on technical terms Central bank purchases government securities=OMO (Openmarket operation) where money shifts hands from RBI to peopleHence money supply increased (In reality money doesnrsquot go to lsquoaam admirsquo directly but thosebankers and non-banking institutions who participate in OMO) Anyways 1 is right Eliminatechoices that do not have 1

a Only 1b 2 and 4c 1 and 3d 2 3 and 4 Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit7 of 29 152015 623 PMNow the 1048627nal answer depends on whether statement 3 is right or wrongStatement 3 says ldquoBorrowing by government from the central bankrdquo (So will it increasemoney supply)How does Government borrow from Central bank Does Mohan just callup Rajan and demand 1lakh crores No Mohan will have to give Rajan that much government securities (vegetables)and Rajan will give him cashIs money supply increased Yes Mohan sold veggies to Rajan and got Money Whenever Rajanbuys veggies and pays ndash the money supply is increased (this is similar to Open Marketoperation)Besides Mohan can then use money to pay salaries of government sta1048627 pay for rail-roadbridgesand other infrastructure projects pay for MNREGA and so on Therefore Answer C 1and 3 correctCounter- argumentWhat if Rajan subsequently sells those (Mohanrsquos) securities to bankers Then bankerrsquos moneyreduced Hence 3 is wrong Therefore 1048627nal answer A only 1So whatrsquos the 1048627nal answer is it A or is it CUltimate judge= UPSCrsquos o1048627cial answer key uploaded on their siteIn 2012rsquos Question paper Test series ldquoArdquo this is Q77 and its o1048627cial answer is ldquoCrdquo Therefore both 1and 3 are correctAnyways what to do in the examSkip If you donrsquot know the concept better skipAttempt This question is attemptable if you donrsquot drag the logic too much in statement 3Mark nReviewYes it can be put under ldquomark and reviewrdquo because this is not an absolute factabsolute de1048627nition type MCQ If you apply some concepts you can eliminate wrongchoices But still if doubt persists in the mind (eg whether Statement 3 is right ornot) then itrsquos always safe to skip and avoid negative marking

By the way What about Statement 2 Deposit of currency in commercial banks by the public (Willit increase money supply or not) Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit8 of 29 152015 623 PMViewpoint 1 yes Because bank can used it to expand loanable credit (as explained in Moneycreation topic in Class 12 NCERT Macroeconomics page 39 onwards)Viewpoint 2 no (Because Bank will have to put some money aside as CRR- so that much moneyis less in the system)Either way it doesnrsquot change the answer Because We know that statement 1 is de1048627nitely correctAnd there is no option where (12) are given simultaneouslyAnyways Moving onhellipSo far RBI has two tools under monetary policy1 reserve ratios (SLR CRR)2 Open market operationThird and the most important ldquoquantitativerdquo tool is3 Policy RateldquoPolicy raterdquo= in case of India its Repo rate Before moving further letrsquos refresh our concepts of Bankrate LAF MSF Repo and Reverse repoBank RateWhen banks borrow long term funds from RBI Theyrsquove to pay this much interest rate to RBI[Note di1048627erent books give di1048627erent explanation of Bank Rate Irsquove used NDTVrsquos de1048627nition(httppro1048627tndtvcomnewscorporatesarticle-repo-rate-and-other-terms-explained-302105)]At present Bank rate= 9Collateral nothing (Bank can borrow money without pledging government securities to RBI)Bank rate is not the main tool to control money supply these daysNowadays RBI uses LAF Repo rate as the main tool to control money supplyOk then Whatrsquos the use of Bank ratePenal rates are linked with Bank rate For example If a bank doesnrsquot maintain CRR SLR as perthe prescribed limitThen RBI can impose penalty interest on such notorious bankAt present Penalty rate = Bank rate + 3 (or 5 in some cases)Meaning if Bank rate = 9 then penalty rate=9+3=12Anyways what if RBI wants to 1048627ght in1048627ation using bank rate as a ldquotoolrdquo Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit9 of 29 152015 623 PM

Obviously they should increase bank rate That way it becomes harder (more expensive) for banksto borrow from RBI=gt SBI increases its loan rates (to keep the pro1048627t margin same) ResultLess people get home loan bike loan business loansLess business expansionLess jobsLess incomesLess demandUltimately shopkeeper will bring down the prices to attract people into buying more thingsThus in1048627ation is reducedLetrsquos update our (stupid) tablePolicy dear money cheap moneyTool To 1048627ght in1048627ation To 1048627ght de1048627ationReserve Ratio (CRR SLR) Increase them Decrease themOpen Market Operation (OMO) RBI sell securities RBI buy securitiesBank rate Increase decreaseLiquidity Adjustment facility (LAF)Liquidity Adjustment facilityRBI started this in 2000 You can imagine it as a ldquoAddagambling dengang-hideoutrdquo where RBIrsquosclients gather consumer desi liquor play cards watch item songs and borrow money from RBI(or lend Money to RBI)By the way who are the clients of RBI= Central and state governments Banks and non-banking1048627nancial institutions (NBFI) NBFI further includesAIFI (all India 1048627nance institutions) NABARD SIDBI EXIM Bank and National Housing BankPrimary dealers (Morgan Stanley Goldman Sachs JP Morgan Chase Standard CharteredBank HSBC etc)Non-Banking 1048627nancial companiesAnyways Under this LAF ldquoaddardquo RBI has two toolsRepoIf client borrows money from RBI (for short term) then client has to pay this muchinterest rate to RBI At present Repo is 8 (article written on 29th Jan 2014) Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit10 of 29 152015 623 PMReverseRepoIf client lends money to RBI (for short term) then RBI has to pay this much interestrate to client RBI doesnrsquot like headache So they made a simple formula Reverse

repo rate= Repo MINUS 1=8-1=7CollateralProblem with running a ldquoaddagambling-denrdquo = sometimes client drinks too much desi liquorand passes out on 1048627oor Sometimes he even dies because of lsquohoochrsquo Sometimes police raidsthe den and clients run away with cash and registerIf such things happen Rajan will be at loss So he demands ldquogovernment securitiesrdquo ascollataral So even if client doesnrsquot repay money on time Rajan can sell those securities (in openmarket operations) and recover moneyLAF Repo RateLetrsquos get a bit technically correct now Observe following image(httpwww1048627ickrcomphotos97816112N0212220419083)ScenarioSBI chairman Arundhati marsquom wants to borrow Rs100 crore (for short term) Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit11 of 29 152015 623 PMShe gives her stash of government securities to RajanRajan gives her Rs100 croreMadam Also signs an agreementldquoI Arundhati Bhattacharya agree to buy same securities from Rajan at 108 crores after 14daysrdquoNotice that she has agreed to ldquore-purchaserdquo same securities from Rajan Therefore its calledldquoRepordquoAnd how much interest rate did she pay on this ldquoloanrdquo [108-100]100=8 Thatrsquos our repo rateImportantRecall that SBI also has to keep part of her money in RBI approved securities (under SLR)So Madam cannot USE those government securities to borrow under Repo Rate from RajanThat leads to a new topicMarginal Standing facility (MSF)MSF mechanism is same as repo But some di1048627erencesLAF (Repo) MSFRajan says ldquodonrsquot come here unlessyou want to borrow minimum Rs5croresrdquoMinimum Rs 1 croreAll clients are welcome ieCentral and state governmentsBanks ndash be it commercial bank orRRB or cooperative bank

Non-banking 1048627nancialinstitutionsSorry Not all clients welcome hereOnly scheduled commercial banks can borrow underthis window SBI PNB BoB ICICI etcThis MSF facility is specially created to help themsolve short-term cash mis-matchYou (bankers) cannot pledgesecurities from SLR quota to borrowfrom this windowCan use securities from SLR quotaNo limit You may borrow as much asyou want (as long as you havegovernment securities to pledge tome)Maximum 2 of NTDL To put this in crude words if SBIreceived 100 crores from aam-admi under savingsaccount current account 1048627xed deposit etc then SBI canborrow only upto Rs2 crores from RBIRajan decides Repo rate (8 rightnow)MSF = Repo Rate +1 = 8+1=9 (earlier this margin of1 used to be higher But nowadays just 1) Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit12 of 29 152015 623 PMfor those who still have doubt about Repo vs MSFfor repo borrowing bank will need to pledge securities to Rajan But bank cannot use SLR-reservedsecurities for thisso imagine if a bank is in dire need of cash but doesnrsquot have spare government securities- thenthey can borrow using MSF by pledging those SLR securities (and under MSF window Rajan willdemand 1 higher than Repo as one type of lsquopunishmentrsquo for pledging SLR securities)Reverse repo RateAlthough self-explanatory But letrsquos checkRepo = clients borrow from Rajan and pay this much interest rate (short term loan)Reverse repo= when Rajan himself borrows from clients then he has to pay this much interestrate to clientsCollateral = yes What if police raids this gambling-den and Rajan runs away to Nepal Clientscan sell Rajanrsquos Government securities and recover their moneyReverse repo = Repo MINUS 1 = 8-1 =7Note in o1048627cial parlance they call percentages in ldquobasis pointsrdquo so 1=100 basis points So inthat lsquoo1048627cial languagersquo Reverse repo = Repo MINUS 100 basis points

Enough cheap jokes What have we learned so farThat Rajan controls money supply using monetary policyUnder Monetary policy Rajan has various ldquoweaponsrdquo (or tools)1 Reserve ratios (SLR CRR)2 OMO Open market operation3 Rates Bank rate LAF (Repo Reverse repo) MSFWe already know how to apply SLR CRR and OMO to 1048627ght in1048627ation (and de1048627ation) let me paste thetable againPolicy dear money cheap moneyTool To 1048627ght in1048627ation To 1048627ght de1048627ationReserve Ratio (CRRSLR)Increase them Decrease themOpen MarketOperation (OMO)RBI sell securities RBI buy securitiesBank Rate increase it decrease it Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit13 of 29 152015 623 PMRepo rate increase it decrease itReverse Repoitrsquos value is linked with Repo hence cannot be increaseddecreasedindependentlyMarginal StandingFacilityitrsquos value is linked with Repo hence cannot be increaseddecreasedindependently Besides MSF= temporary 1048627re1048627ghting cashmismanagementWe learned that Rajan doesnrsquot use Bank rate much to control money supplyWe learned that Rajan doesnrsquot decide Reverse repo and MSF (theyrsquore automatically -1 and +1of Repo rate)Thus the only thing Rajan has to decide under monetary policy= Repo rate Therefore Repo rateis called the ldquopolicy raterdquoLetrsquos revisit out 1048627ow chartSituation Economy has in1048627ationary trend Prices of goods and services increasing every daySolution Rajan increases ldquoRepo raterdquo (say from 775 to 8)Result it becomes expensive for SBI to borrow from Rajan Theyrsquoll increase their own rates aswellWait HowJust like how things roll in Onion bizIf prices of Onion rise in Maharashtrarsquos wholesale yard (in Lasangaon) then immediately retail

veggie Ahmedabad will also raise their onion prices to keep the pro1048627t margin sameWhatrsquoll be the consequences (if repo rate is hiked increased)ConsequencesSBI raises its loan 1 interest rate (to keep pro1048627t margin same)2 Businessmen borrow less money from SBI3 Businessmen donot start new business Donot expand existing business4 Less jobs5 Less income6 Less demand7 Ultimately shopkeeper will bring down the prices to attract people into buying more things Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit14 of 29 152015 623 PMThus in1048627ation is reducedPolicy dear money cheap moneyTool To 1048627ght in1048627ation To 1048627ght de1048627ationReserve Ratio (CRR SLR) Increase them Decrease themOpen Market Operation (OMO) RBI sell securities RBI buy securitiesPolicy Rate (Repo Rate) Increase it Decrease itRepo Rate in recent yearsLetrsquos observe with a graph how RBI fought in1048627ationde1048627ation in recent times using Repo rate as theldquomain-weaponrdquo of monetary policy(httpwww1048627ickrcomphotos97816112N0212220418853)From above above graph you can see RBI has frequently changed its repo rate to combat bothin1048627ationary and de1048627ationary trend But Yoursquod agree that in1048627ation has not been contained Nomatter what number juggling or statistical interpretations are given- the hardship of common manhas not stopped- be it milk petrol onion LPG anything Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit15 of 29 152015 623 PMAgreed that prices of onion sugar pulses and food are subject to vagaries of monsoon andblack marketeering Rajan cannot do anything about itAgreed that crude oil prices are subject to rupee-Dollar exchange rate external factors andgovernmentrsquos de-regulation of their prices Rajan doesnrsquot have much control over thisBut still even in the non-food non-fuel type commodities- RBIrsquos monetary policies have failed tocurb in1048627ation WHY Observe the following image(httpwww1048627ickrcomphotos97816112N0212220829396)

Suppose Vijay Mallay got 100 crore loan from State Bank of India If you trace the lsquosourcersquo of thatmoney itrsquoll turnout 60-70 crores came from bankrsquos savings account 1048627xed deposit etc Rajan lendsmoney in repo rate ndashyes but that doesnrsquot mean banks depend only on Rajan to arrange the cash forits clientsSuppose Rajan reduces repo rate from 8 to 5 Banks are not legally required to reduce their loaninterest ratesThe current system is following Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit16 of 29 152015 623 PMBanks are free to decide their base rate Eg SBIrsquos base rate is 10It means SBI wonrsquot loan money to anyone at an interest rate lower than 10 (except thosefarmers under Interest subvention scheme)SBI will link all of its loan products with Base rate For exampleSBI Base rate =10 Calculation ResultCar loan 075 above Base rate 1075Two wheeler loan 825 above base rate 1825Education loan (upto 4 lakh) 35 above base rate 135Home loan for women (upto 75 lakh) 010 above base rate 1010Meaning if SBI changes her Base rate then all of above loan interest rates will change automaticallyIf Rajan changes his repo rate will SBI change her base rateNot alwaysBecause those common men are the main suppliers of money to SBIRBI is not the main supplier of money to SBISBI will only change its base rate when she feels necessary for its own pro1048627t loss compared toits competitorsDoes it mean Repo rate system is bogus and ine1048627ectiveNot alwaysIn developing countries like India most people park their money in only four things savingsaccount 1048627xed deposit (FD) provident fund and LIC Wersquove mutual funds wersquove NPS wersquove ULIPswersquove Rajiv Gandhi equity savings scheme ndashbut most people (particularly the older generation) feels insecure in into such new thingsTherefore lot of money 1048627ows into Savings accounts and 1048627xed deposits= SBIrsquos main source ofmoneyBut In advanced economies like USA people donrsquot invest large portion their income in savingsaccount or FD Theyrsquove variety of investment options So for those American banks their ownCentral bank (US Feds) is a signi1048627cant money supplier

Hence US Fedsrsquo monetary policy shows faster impact on their American Banks THAN Rajanrsquos Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit17 of 29 152015 623 PMmonetary policy on Desi banksMonetary Policy limitationsIn developing countries Monetary fails to bring quick results becausePeople donrsquot have many investment alternatives Commercial banks have large deposits Rajanis not the main or even prominent money supplier for these banks Whatever Rajan does itse1048627ect will be felt only after 6-8 months but by that time new factors would cause another rise inin1048627ation and Rajan will have to start from scratch again1Non-Monetized economy in rural areas many transactions are still of barter nature (Egkiranawalla cum middleman supplies seeds pesticides fertilizers- in exchange of share infarmerrsquos produce)2Lack of 1048627nancial inclusion Since most people are not in the banking net They rely on Shro1048627sand moneylenders Many of them circulate the black money of cops and politicians and charge36 interest rate on loans Rajan has no control over them3Monsoon uncertainty cyclone 1048627ood draughts and their e1048627ect on food production Foodin1048627ation =gtnewspaper walla washerman barber car mechanic everyone will raise their servicefees to accommodate their raised cost of living Rajan has no control over them4Crude oil and gold import + negative e1048627ect when rupee weakens Rajan can try to bring1$=Rs65 to $1=63 Rs But he has not enough forex reserves to bring $1=Rs505Fiscal de1048627cit illogical schemes eg MNREGA worker digs a temporary road After 1048627rst rain t heroad is wiped out= physical infrastructure added to economyhellip no Wages raisedhellipyes = thismismatch leads to more in1048627ation67 Subsidy leakage Black money underground economyAnd most importantly because Rajan uses Multi-indicator approach he focuses on WPI (minus

food and fuel) Thatrsquos why Urjit Patel recommends him to target CPI More on that in next article8So far we learned that RBI has two sets of toolsinstruments under monetary policyQuantitative tool Qualitative tools1 Reserve ratios2 OMO3 Policy rate (Repo Rate)Wersquoll see them in a momentQualitative Tools1 Margin Requirements LTV Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit18 of 29 152015 623 PMMallya wants to borrow from SBI He pledges his companyrsquos shares worth Rs100 crores ascollateralFor such loans Rajan can prescribe margin say 65In that case even if Mallya pledges 100 crores worth shares SBI can give him 100-65=only 35Crore rupees as loanUsing this tool Rajan can control money supply eg during in1048627ation he should increase marginrequirement so Mallya can borrow less=gt less job=gtless income=gtless demand=gtpricesreducedIf Rajan changes repo rate it is not compulsory for SBI to change her loan interest rates (we sawhow Alok Nath keeps giving money to SBI so they are not entirely dependent on Rajan)But if Rajan changes margin requirements then SBI and all other banks must obey it In otherwords this tool has direct impact on money supply2 Consumer credit regulationSuppose Nano car sells 1 lakh and Rajan has made rule that downpayment cannot be lessthan 30It means customer must bring Rs30000 from his pocket and bank can only give him maximum70000 as loanHow can Rajan 1048627ght in1048627ation with this toolIncrease downpayment from 30=gt50 (meaning bank can give less loan Customer himselfhas to arrange lot of money from his own pocket)Rajan can make rule ldquobanks cannot accept EMI less than 5000 on car loanrdquo ObserveCase 1 100 EMIs worth 1000 each = 100000 (ignore interest rates)Case 2 20 EMIs worth 5000 each=100000 (ignore interest rates)

In case 2 some of the lower-middleclass families may postpone their decision to purchase nanocar (Because they canrsquot a1048627ord higher EMIs)Result= less demand=gtprices reduced (indirectly- because car mechanics get less worknumber-plate painters get less orders etc so they reduce fees to attract new clients and retainexisting clients)Thus Rajan can control money supply by changing downpayment and installment (EMI) rules3 Selective credit control Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit19 of 29 152015 623 PMUnder this Rajan can speci1048627cally instruct bankers not to give loans to traders of certaincommodities eg sugar gur edible oil etceven if the said trader is ready to mortgage his sharesbondsfactorymachinevehicle anythingthis prevents speculations hoarding of commodities using money borrowed from banks4 Moral SuasionHere Rajan tries to persuade the bankers to do xyz thing ExamplePlease reduce giving automobile loans- instead park your money in government securities(above the SLR requirements)12 Irsquove reduced my repo rate now you also reduce your base rateRajan will try to in1048627uence those bankers via- direct meetings conference giving media statementsgiving speeches public seminars university convocations etc (even where bankers are notpresent) Hersquoll do so to build a public opinion media opinion and in1048627uence those bankers bymaking them feel lsquoguiltyrsquoRationing ofcreditFound in Planned economiescommunist nationsHere central bank will decide ldquoupper limitrdquo to loans in each sector (heavyindustries service agriculture small-scale etc)So once that lsquoquotarsquo is over Additional loans cannot be given to thatborrowers from that sector This also controls money supplyDirectactionMeans RBI gives punishment to erring banks Punishment can involve penalinterest refuses to lend them money from LAF etc and in worst case evencancels their banking licenseLetrsquos recap

Monetary policy tools Quantiative vs QualitativeQuantitative Qualitative1 Reserve ratios (SLR CRR)2 Open Market Operation3 Policy rate (Repo Rate)1 Margin requirements LTV2 Consumer credit regulation3 Selective credit control4 Moral Suasion5 Rationing of Credit6 Direct Action Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit20 of 29 152015 623 PMIndirect in nature (Even if Rajan changes repo rate itsnot necessary SBI will immediately change its base rate loan interest rates)Direct in nature (eg those marginrequirements)General- they a1048627ect money supply in entire economybeit housing automobile manufacturing- everythingSelective- can a1048627ect money supply in aspeci1048627c sector of economy egautomobileLetrsquos solve an O1048627cial MCQ from UPSC 2012 Question paperQ RBI Acts as bankerrsquos bank This would imply which of the following1 Other banks retain their deposits with RBI2 RBI lends funds to commercial banks in the times of need3 RBI advises commercial banks on monetary mattersCorrect Statement1 Only 2 and 32 Only 1 and 23 Only 1 and 34 1 2 and 3ApproachWhenever you face such 3 statement MCQ or 4 statement MCQ Always use ldquoeliminationrdquo methodFirst you 1048627nd out a statement that is de1048627nitely right or de1048627nitely wrong In above case we can see2 is de1048627nitely right RBI lends funds to banks in the times of need (Repo MSF)So letrsquos eliminate choices that donrsquot involve statement 21 Only 2 and 32 Only 1 and 23 Only 1 and 34 1 2 and 3This did not help much We still have three choices left Observe statement 1 Other banksretain their deposits with RBI That is correct with respect to cash reserve ratio CRR is one type

of deposit that banks make to RBI (RBI doesnrsquot pay interest on it- thatrsquos a di1048627erent story)Meaning 1 is also correct eliminate choices that donot have 1 Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit21 of 29 152015 623 PM1 Only 2 and 32 Only 1 and 23 Only 1 and 34 1 2 and 3Only two choices left and the ultimate solution = is statement 3 is correct or notViewpoint 1 Viewpoint 2The statement says ldquoRBI advises commercial banks onmonetary mattersrdquoThe word ldquoadvisesrdquo makes thisstatement incorrect Because RBI doesnrsquot ldquoAdvicerdquo they justorder the banks- be it SLR CRR PSL RBI doesnrsquot advice RBIgives orders and direction Therefore statement 3 iswrongRBI does advice those banks Wesaw it under ldquoMoral SuasionrdquoTherefore Statement 3 is rightEven if we accept that RBI ldquoadvicesrdquo still the questions askswhat is implied by ldquoRBI as Bankerrsquos bankrdquo So RBI advicesldquomoral suasionrdquo that is a monetary policy tool RBIrsquos notdoing it as a ldquoBankerrdquo to those banks Therefore Statement3 is de1048627nitely wrongMoney Banking and 1048627nance ENarayan Nadar (PHI publication)He has speci1048627cally listed thisldquoAdvicerdquo function under Bankerrsquosbank topicAnswer (B) Answer (D)So is it B or is it D Final judge is UPSCThey had uploaded CSAt-2012 o1048627cial answer key on their siteThis question is Test Series A Question 75 and its o1048627cial answer is ldquoDrdquo = meaning all threestatements are correctIf you face such MCQ in exam what should be your approachSkipUpto you But if you start skipping all such question (OMO Money supply Bankerrsquosbank) because yoursquore completely unaware of those topics=that is not pardonableitshows yoursquore underprepared for this exam You should either change your studymethod or change the game- try for some easier examAttemptThis question is attemptable if you donrsquot lsquonitpickrsquo over the word ldquoadvisesrdquo in third

statementMark nReviewIf yoursquove thoroughly prepared the RBIrsquos monetary tools (both qualitative andquantitative) you can solve it by applying conceptsprinciples- particularly themoral suasion thing But if yoursquore still doubtful over whether 3 is right or wrongthen better skip If you skip because yoursquore lsquodoubtfulrsquo = that is pardonable But if youskip because yoursquore completely unaware of this topic= non-bailable o1048627ense Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit22 of 29 152015 623 PM

AppendixThese are the topics I wanted to discuss in the article but they would break the 1048627ow of other topicsHence writing them bottom1 Why High SLR and High CRR are badFrom the discussion so far you might think why Rajan only focuses on Repo rate to control moneysupply Why not simply raise SLR and CRR requirementsLetrsquos check the de-merits of high SLR and CRRPrior to LPG reforms in 90s RBI used to keep SLR and CRR very high Letrsquos take an exampleA Bank can two types of depositsDeposit type examplesTime Deposit Fixed deposit (FD) recurring depositDemand Deposit Savings account current accountUsing this money bank has to count its Net Demand and Time liabilities (NDTL) every fortnightSuppose its 100 croresBoth CRR and SLR are counted on this 1048627gure In the old times these reserve ratios used to be ashigh as 15 and 40 respectively Observe the e1048627ectNet Demand and Time Liabilities (NDTL) +100 crReserve ratiosCRR (15) (-) 15 [no pro1048627t]SLR (40) (-) 40 [some pro1048627t]Money left with bank =45 crFrom 100 crores barely 45 crores left with the bank But adding insult to the injury- even here RBImandates Priority sector lending (PSL) Meaning at least 40 of the loans has to be given tofarmers small businessmen students etc groupsLetrsquos update the table Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit

23 of 29 152015 623 PMNet Demand and Time Liabilities (NDTL) +100 crReserve ratiosCRR (15) (-) 15 [no pro1048627t]SLR (40) (-) 40 [some pro1048627t]Money left with bank =45PSL (40) =45 x 04 =18 croreMoney left for big borrowers (ie big businessmen upper middleclass) =45-18=27 croresBy the way PSL is counted on annual basis while SLR CRR counted on fortnight basis so abovetable is technically incorrect but Irsquove plugged in those numbers only for the sake of explanationbefore the 90s- Government would even interfere and order public sector banks to givePSL-loans cheap interest rates The local politicians would coerce the branch manager to givePSL-loans to ineligible people They default on loans Branch manager cannot recover money(because defaulter will goto civil court then taarikh pe taarikh) So bank would have to forgetabout most of those 18 crores given in PSL loansAnyways you can see people deposited 100 crores in the bank yet bank is left with barely 27crores (over which bank has ldquoFreedomrdquo to decide whom they should give the loan)What are the consequences for businessmenHigh cost of credit (because bank will try to make maximum pro1048627t from those 27 crores- sobank will charge very high interest rate on the business loans- to pay o1048627 for the sta1048627 salariesbranch o1048627ce rents and everything)12 Businessman cannot expand his business3 Less exports4 Less tax income for the governmentSo in a way- that was also one of the factors leading to Balance of Payment crisis (and subsequentlyLPG reforms) You can read more about that in NCERT Class 11- chapter 2 and 32 Narsimhan (I) Committee 1991Plagued by problems and losses in nationalized banks Government of India formed thisCommittee Recommendations were Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit24 of 29 152015 623 PMDeregulate interest rates Let the banks decide their loan interest rates Accepted Gradually we

moved to the Base Rate system1PSL loans should be given at normal interest rates Accepted (but with exception=gt interestsubvention- that we saw under Nachiket articles)2NPALoan default matter should be handled by separate body and not civil courts Result Debtrecovery tribunal created in 1993 Ultimately SARFAESI Act in 20023Reduce CRR 4 SLR Accepted Today wersquove them 4 and 23 respectivelyAllow Private banks and foreign banks RBI invited applications in 1993 ICICI Axis HDFC andmany others got license5Liberate Branch expansion policy Done (Except that 25 rural branching mandate we sawunder Nachiket articles)67 Prepare NBFC regulatory framework AcceptedGovernment should reduce shareholding (and thereby its o1048627cial in1048627uence) in the public sectorbanks Government agreed Today governmentrsquos shareholding in SBI =~6083 Narsimhan (II) Committee 1998Suggested more reforms1 allow VRS in the banks so they can get rid of excessive sta1048627Suggested additional Legal reforms for loan recovery =gtSARFAESI 2002 (httpmrunalorg201212economy-sarfaesi-asset-reconstruction-company-arc-security-receipt-sr-qib-drthtml)2Computerization electronic fund transfer legal framework =gt Payment and SettlementAct=gtRetail (ECS NEFT credit Card) + Wholesale (RTGS)3Permit new private foreign banks RBI invited license in 2001= Yes Bank and Kotak Mahindragot licenses 2013 RBI again invited applications for bank licenses4[Note list of recommendations not exhaustive Irsquove only highlighted important topics that showlsquoevolutionrsquo of banking sector in recent times]Mock QuestionsWith open market operations RBI cana increase liquidity in the economy but cannot decrease itb decrease liquidity in the economy but cannot increase it

c Can increase or decrease liquidity in the economy to control money supplyd None of above1By which of the following methods government can reduce money supply in the economya taxationb sale of securities to public2 Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit25 of 29 152015 623 PMc both A and Bd neither A nor BDuring the period of de1048627ationa RBI should use dear money policy to combat itb Government should reduce its tax ratesc both A and Bd Neither A nor B3IF prices are lowered without causing unemployment we call ita stag1048627ationb re1048627ationc dis1048627actiond Disin1048627ation4Which of the following contains correct set of quantitative instruments of monetary policya reserve ratio bank rate margin requirementsb open market operations margin requirements regulation of consumer creditc cash reserve ratio bank rate open market operationd None of above5Which of the following contains correct set of qualitative instruments of monetary policya reserve ratio bank rate margin requirementsb credit rationing margin requirements regulation of consumer creditc cash reserve ratio bank rate open market operationd None of above6Q7 To counter the e1048627ect of de1048627ation which of the following steps should RBI initiate1 decrease reserve ratios2 buy government securities through open market operation3 increase policy rateAnswer choicesa only 1 and 2b only 2 and 3

c only 1 and 3d 1 2 and 3Q8 To counter in1048627ation which of the following steps should RBI initiate Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit26 of 29 152015 623 PM1 Increase reserve ratios2 sell government securities through open market operation3 Increase policy rateAnswer choicesa only 1 and 2b only 2 and 3c only 1 and 3d 1 2 and 3Q9 Which of the following may cause de1048627ation in the economy1 RBI raises policy rate2 RBI raises cash reserve ratio3 RBI sells securitiesChoicesa only 1 and 2b only 2 and 3c only 1 and 3d all 12 and 3Q10 Money supply in the economy is a1048627ected by1 Cheap money policy and dear money policy2 Open market operation and Moral Suasion3 Consumer credit regulation and loan to value ratioChoicesa only 1 and 2b only 2 and 3c only 1 and 3d all 1 2 and 3Q11 An increase in SLR Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit27 of 29 152015 623 PM1 will restrict the expansion of bankrsquos credit2 will increase bankrsquos investment in safe securities3 will ensure solvency of the bankschoicesa only 1 and 2b only 2 and 3c only 1 and 3d all 12 and 3Mainsinterview type questions- after we check Urjit Patelrsquos recommendations on strengtheningmonetary policyHints

1 can increase by buying can decrease by sellingboth [or only B depending on how UPSC examiner interprets the e1048627ect of taxation on moneysupply In one of the reputed book on Banking and 1048627nance author Narayan Nadar claimedtaxation can a1048627ect money supply]2dear money policy during de1048627ation =adds insult to the injury of businessman If governmentreduces tax- then its revenue collection will drastically reduce So both incorrect [OR debatabledependingon how UPSC examiner interprets the e1048627ect of taxation during de1048627ation]34 directly given in the article5 see the last table in the article6 see the last table in the article7 observe the table before the topic ldquorepo rate in recent yearsrdquo8 same as above9 same as above10 All correct (Unless you nitpick and drag the logic too much)11 same as above Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit28 of 29 152015 623 PM Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit29 of 29 152015 623 PMRBIOrigin of RBI Who is the current governorwhom did he replace1RBI vs SEBI vs IRDA Name of their main bossesWho controls what NBFCs MFI Gold LoansULIP Mutual funds etc23 powers functions of RBI4 How does RBI control the money supplyOpen market operations MSF liquidityadjustment facility56 SLR CRR Repo Reverse repo bank ratePriority sector lending and its subsectors Howdo they apply to Domestic bank vs foreignbank7Currency chest Mint and press Who signscoins and currency89 Measures of money supply

Foreign exchange management components offorex reserves approx forex under RBIPowers under FERAFEMA TaraporeCommittee on capital account convertibility10Banking regulation act and its recentamendment11Banking reform Banking License NarsimhanBASEL12Banks BasicsWhat is bank What are its functionshow is it di1048627erent from an NBFCNBFCfactorPost-o1048627ce savings Chit FundNidhi etc1Types of banks commercial banksregional rural banks cooperativebanks investment banks developmentbanks etc23 What is a Scheduled commercial bankPublic sector versus private sectorbanks Where does RTI apply45 IDBI ICICI IFCI SIDBI EXIM NHB etcBank nationalization mergers andconsolidations67 Names of chairmanCMD of big banksBasic GK related to banks 1048627rstcommercial bank in India 1048627rst banksetup by Indians origin of SBIICICIsubsidiaries of SBI etc8Banking services1 Assets liabilities and working capital of a bank2 Demand liabilities vs time liabilitiesBankerrsquos rights (lien) Know your customer (KYC) norms Adhar Card enabled payment Moneylaundering Benami transections3Types of Bank customers and provisions related to them1 Minor-Guardian partnership 1048627rms2 HUF and karta3 NRI PIO4

IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes3 of 31 152015 539 PM4 joint account holders5 Married Women6 partnership 1048627rm accounts7 publicprivate companies8 trusts and cooperativesTypes of bank accounts and their features1 current account savings account2 term deposit account 1048627xed deposit3 PPF senior citizenrsquos account4 NRE-rupee account FCNR account RFC EEFC escrow account5 Allied topic post o1048627ce savings account and National savings certi1048627cate5Unclaimeddormant accounts RBI provision for them Death of customer insolvent customerliquidation Garnishee orders6Types of negotiable instruments bank draft bank check promissory note warehouse receiptTreasury bills etc7Cheque1 orderbearertravelbankers cheque2 endorsement cheque-crossing3 post-dated cheque what if cheque-date is invalid (31 Feb) or holiday (2 Oct)4 when Bank should not pay cheque-dishonor (cheque-bouncing)5 MICR Cheque truncation new CTS-system6 Note refund rule clan note-policy89 demand drafts telegraphic transfers safe deposit lockers10 ATM PIN HWAK White Label ATM third party ATM11 Debit card credit card smart card12 Mobile Banking personal banking tele-banking corporate bankingOnline banking1 NEFT RGTS EFTS Bankwire E-commerce2 networking among banks INDONET BankNET RBINET SWIFT Point of Sale (POS) terminal3 core-banking solutions4 Electronic signature and Information Technology Act13Loans1 di1048627erent type of loan products2 Subprime lending3 mortgage reverse mortgage collaterals stamp duty on loan documents4 lien set-o1048627

5 Priority sector lending and its subsectors How do they apply to Domestic bank vs Foreign14st nd IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes4 of 31 152015 539 PMbank15 bank guarantee letters of credit16 Banking Ombudman powers functions appeal structure and Consumer courts17 Bancassurance cross-selling universal narrow retail bankingRural banking1 RBI vs NABARD2 Rural infrastructure development fund (RIDF) and budget-2013 allocation for RIDF1048627nancial inclusion and various government schemes associated with it (covered in my economicsurvey summaries available on mrunalorgeconomy)34 regional rural banks their amalgation5 cooperative banks6 micro-1048627nance institutions (MFI)7 primary agricultural credit Society8 Banking correspondent agents (covered in my article)9 lead bank scheme local area banks service area approach10 Kisan credit card interest subvention on crop-loans^Almost all of these topics have been covered in my articles on MrunalorgEconomyBad Loans1 What is NPA2 Gross NPA versus net NPAAsset classi1048627cation under NPA(substandarddoubtfulloss)3Current 1048627gure of NPA Which bank has highestNPA45 Capital adequacy norms hypothecation6 CIBIL and credit rating7 SARFAESI Act and its recent amendment8 asset reconstruction companies9 Debt recovery tribunals10 Lok Adalats11 Industrial sicknessBoard for industrial and 1048627nancialReconstruction12International banking

1 Bretton Woods2 World Bank3 IMF SDR voting rightsWho are the Main boss of IMF WorldBank ADB45 BASEL6 bank for International settlement7 Asian clearing union8 Islamic Banking9 ADR GDR IDR IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes5 of 31 152015 539 PMagain most of these topics have been covered in my articles on MrunalorgEconomySample questions from previous papersObserve the following questions asked in previous IBPS PO papers itrsquoll give you an idea on whatkind of information you should be focusing on while reading the banking awareness theoryQ RBI relatedWhich of the following is a correct statementState Bank of India is the sole authority toissue and manage currency in IndiaaA nationalised bank is the sole authorityto issue and manage currency in IndiabA cooperative bank is the sole authority toissue and manage currency in IndiacRBI is the sole authority to issue andmanage currency in India None of thesed1By increasing repo rate the economy mayobserve the following e1048627ectsRate of interest on loans and advances willbe costlieraIndustrial output would be a1048627ected to anextentbBanks will increase rate of interest ondepositscIndustry houses may borrow money fromforeign countries

de All of these2Which of the following is NOT a functionof the Reserve Bank of Indiaa Fiscal Policy Functionsb Exchange Control FunctionsIssuance Exchange and destructionof currency notescd Monetary Authority Functionse Supervisory and Control Functions3Interest payable on savings bankaccounts isa Not regulated by RBIb Regulated by State Governmentsc Regulated by Central Governmentd Regulated by RBIe Regulated by Finance minister4Q Bank Nationalisation types of banks related IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes6 of 31 152015 539 PMNationalization of banks aimed at all of the following excepta Provision of adequate credit foragriculture SME amp exportsb Removal of control by a few capitalistsc Provision of credit to big industries onlyd Access of banking to massese Encouragement of a new class of entrepreneurs5 Axis Bank is aa Public Sector bankb Private Sector Bankc Co-operative Bankd Foreign Banke Gramin Bank6Q Banking servicesWhich of the following statements istrueBanks cannot accept demand andtime deposits from publicaBanks can accept only demanddeposits from publicbBanks can accept only timedeposits from public

cBanks can accept both demandand time deposits from publicdBanks can accept demand and timedeposits only from governmente1With reference to a cheque which ofthe following is the lsquodrawee bankrsquoa The bank that collects the chequeb The payeersquos bankc The endorseersquos bankd The endorserrsquos bankThe bank upon which the cheque isdrawne2Which one of the following is a retail bankingproducta Home Loansb Working capital 1048627nancec Corporate term loansd Infrastructure 1048627nancinge Export Credit3A money deposit at a bank that cannot bewithdrawn for a preset 1048627xed of time is known asaa Term depositb Checking Accountc Savings Bank Depositd No Frills Accounte Current Deposit4Q online banking related IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes7 of 31 152015 539 PMAn ECS transaction gets bounced and you are unable torecover your money from your customer Under which Actcriminal action can be initiateda Indian Penal Codeb Negotiable Instruments Actc Criminal Procedure Coded Payment and Settlements Acte Indian Contract Act1Upper limit prescribed for

RTGS transaction isa Rs 1 lacb Rs 2 lacsc Rs 5 lacsd Rs 50 lacNo upper limit isprescribede2NEFT meansNational ElectronicFunds Transfer systemaNegotiated E1048627cientFund Transfer SystembNational E1048627cient FundTransfer SolutioncNon E1048627ective FundsTransfer SystemdNegotiated ElectronicForeign TransferSysteme3Q ombudsman relatedMr Rajendra had 1048627led a complaint with BankingOmbudsman but is not satis1048627ed with the decision What isthe next option him for getting his matter resolveda Write to the CMD of the Bankb File an appeal before the Finance Ministerc File an appeal before the Banking Ombudsman againd File an appeal before the Dy Governor RBISimply close the matter as going to court involves timeand moneye1Banking OmbudsmanScheme is applicable to thebusiness ofAll scheduledcommercial banksexcluding RRBsaAll scheduledcommercial banksincluding RRBs

bc Only Public Sector Banksd All Banking CompaniesAll scheduled banksexcept private bankse2 IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes8 of 31 152015 539 PM

2 Banking Awareness (Current Affairs)for this yoursquove to keep an eye on the newspapers + monthly current a1048627airs in magazines Mainfocus areas1 RBIrsquos monetary policy and key ratesAny committee made by RBIgovernment for Banking sector Who is its chairman and what isthe purpose23 Any new directives to banks by RBIFinance MinistryPerson in News Any new appointments in RBIBig Banks Any Indian being appointed in foreignbanks45 Banking license entry of foreign banks6 When a big bank launches a new productGovernment schemes associated with 1048627nancial inclusionpensioninsurance swabhimanswavalamban etc7Important Whenever you come across above info Note them in a separate diary1048627le and revisemultiple timesObserve the sample questions from previous IBPS PO exams this will give you an idea on what typeof information to focus on while reading current a1048627airs IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes9 of 31 152015 539 PMFinance Ministry has asked the Reserve Bankof India to allow common ATMrsquos that will beowned and managed by non-banking entitieshopping to cut transaction costs for banksSuch ATMrsquos are known asa Black Label ATMrsquosb O1048627site ATMrsquosc On site ATMrsquos or red ATMrsquosd Third party ATMrsquos

e White label ATMrsquos1The committee on review of National SmallSaving Fund (NSSF) was headed bya Dr C Rangarajanb Mr UK Sinhac Dr YV Reddyd Mrs Shyamala Gopinathe Dr Usha Thorat2Who is the chairman of the committeeconstituted by RBI to study Issues andConcerns in the Micro Finance Institutions(MFI) Sectora YH Malegamb Dr KC Chakrabortyc C Rangrajand M Damodarane Smt Usha Thorat3Which of the following states became the 1048627rststate in the country to launch RBIrsquos e-paymentsystem for commercial tax payers41 Andhra Pradesh2 Kerala3 Gujarat4 Maharashtra5 KarnatakaAs per revised RBI Guidelines Provisionon secured portion of loan accountsclassi1048627ed as Doubtful Assets for morethan one year and upto 3 (three) years isto be made at the rate ofa 15b 20c 40d 25e 305Which of the following banks is headedby a woman CEOa Bank of Barodab HDFC Bankc Central Bank of Indiad Punjab National Banke ICICI Bank6Who among the following has been

appointed as a director on board of Bankof America-the 1048627rst non-American on theboard of the one of the largest 1048627nancialinstitutions in the worlda Azim Premjib Ratan Tatac Mukesh Ambanid KV Kamathe Chanda Kochar7Enough of Banking awareness letrsquos move to next topic IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes10 of 31 152015 539 PM

3 Economy (Theory)Although in previous IBPS exams within economy they gave more emphasis on current a1048627airs overtheory portion But still You must get a good grasp over basic concepts of economy Because offollowing reasonsFor the interview group discussion stage of banksIIMsState PCSUPSC exam yoursquoll have toprepare current a1048627airs related to Economy particularly downfall of rupee current accountde1048627cit petroleum pricing FDI etc1For that ^that yoursquoll have to read newspapers and news columns but those people write articleswith assumption that reader already knows the basic theory So if you donrsquot know the theoryyoursquoll 1048627nd those articles boringdi1048627cult to grasp=gt shallow answers during interviewGD=lowmarks=no selection or lower rank2 IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes11 of 31 152015 539 PMBasicBasic terms GDP NDP GNP NNPrecession purchasing power parity etc1Three types of Economies CapitalismSocialist communism + LPG reforms ofIndia23 human development index4 millennium development goalsIndian Economy

Planning commission National developmentCouncil 1048627ve-year plans main targets of 121048627ve-year plan114th Finance commission and who is itschairman2In1048627ation types impact various termsassociated with in1048627ation WPI CPI their newseries who calculates what3IIP industrial licensing de1048627nition of MSMEitems reserved for SSI45 public sector undertaking disinvestment IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes12 of 31 152015 539 PMFinanceMoney market vs capital marketfunctions who supervises them1Commercial bills Treasury billscerti1048627cate of deposit commercialpaper2Derivatives options-futures currencyswaps34 underwriting factoringdebt vs equity IPO-shares stocksdebentures bonds mutual funds(+NAV) G-sec56 venture capital angel investor7 SEBI functions who is their main bossStock Exchange BSE NSE SENSEXDollex etc89 Credit rating CRISIL Moody SampP etc10 participatory notes QFI FIIFDI and its limits in various sectorsFIPB1112 PAN card and DEMAT accountexternal commercial borrowing (ECB)ADR GDR IDR13Budget

Taxationdirect vs indirect taxation powers of unionand stateab tax deduction at sourcec tax slabsd negative list in service taxe PAN Card E-1048627lling of tax returnsf Basics of VAT GST12 types of budgets surplus de1048627cit balanced3 votable vs non-votable items4 Finance Bill and appropriation Bill5 cut motions policy cut economy cut token cut6 general budget versus railway budget7 revenue versus capital expenditure8 standing committees of Parliament9 types of de1048627cits FRBM targets10 1048627scal de1048627cit and its impact on economyConsolidated fund contingency fund publicaccount11Insurance1 Types of insurance2 Nationalization LIC GIC etc3 IRDA chairman power-functions4 NPS EPFO ESIC social security5 pension-insurance reforms FDI6 BancassuranceForeign tradecurrent account capital account balance oftrade balance of payment12 rupee convertibility3 currency devaluation appreciation4 GATT WTO5 FERA FEMA6 NEER REERSample questions from previous papers IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes13 of 31 152015 539 PMFinancial inclusion means provision ofFinancial services namely paymentsremittances savings loans and insuranceat a1048627ordable cost to persons not yetgiven the same1Ration at a1048627ordable cost to persons not

yet given the same2House at a1048627ordable cost to persons notyet given the same3Food at a1048627ordable cost to persons not yetgiven the same4Education at a1048627ordable cost to personsnot yet given the same512 When the rate of in1048627ation increases1 purchasing power of money increases2 purchasing power of money decreases3 value of money increasespurchasing power of money remainsuna1048627ected45 amount of money in circulation decreasesWhen there is a di1048627erence between allreceipts and expenditure of the Govt ofIndia both capital and revenue it iscalled1 Revenue De1048627cit2 Budgetary De1048627cit3 Zero Budgeting4 Trade Gap5 Balance of payment problem3Which of the following is not considereda money market instrumentA Treasury billsB Repurchase AgreementC Commercial PaperD Certi1048627cate of DepositE Shares and bonds4^as you can see from theory very easy questions have been asked Hence just get an overviewdonrsquot spend too much time on Economy theory portion Now moving to4 Economy Current AffairsMain focus should be on Union Budget 2013 + Economic surveyThe summary of all Economic survey chapters=available on Mrunalorgeconomy And in thosesummaries Irsquove also included various government schemes organizations even the Humandevelopment indexldquoNumbersrdquo related to Economy

IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes14 of 31 152015 539 PMFor ldquoNumbersrdquo prepare following1 latest Estimates of GDP2 IIP WPI CPI highest lowest in recent times3 Repo rate CRR SLR Bank rate highest lowest in recent times4 Rupee vs dollar highest lowest in recent times5 1048627scal de1048627cit current account de1048627cit6 latest FDI limits in various sectors7 top-5 items in export and importexcise service tax income tax custom duty (highest to lowest in terms of income togovernment)8For remaining current a1048627air related matters eg USEU economic problems measures taken bygovernment to boost investmentGDP curb current account de1048627cit gold consumption etc1 Economy section under any one Monthly current a1048627airs magazine ANDOR2 economy related news within monthly updates of Competitionmastercom+keep a habit of reading English newspaper on daily basis itrsquoll help you in readingcomprehension general awareness and interview3 IBPS Banking Awareness amp GA High Priority topics Studyplan httpmrunalorg201309studyplan-ibps-cwe-pomt-general-awarenes15 of 31 152015 539 PM

of-wants-division-of-labour-part-1htmlbarter-lim)) Therefore people switched to money systemFinancial intermediates = middlemen who help in the circular 1048627ow of money betweenhouseholds and business 1048627rmsThere are two types of 1048627nancial intermediaries banking institution and non-banking 1048627nancialinstitutionsRBI controls (all) banks and (some) non-banking 1048627nancial institutionsRBIrsquos main job is to control Money supply in this game and thereby 1048627ght in1048627ation and de1048627ationIn1048627ation = price rise = bad for economy you know that by common senseBut De1048627ation = price decrease = we can buy things at a lower price Isnrsquot that good Why isde1048627ation bad for economyAns Every business has lsquo1048627xed cost of productionrsquo say minimum light bill phone bill o1048627ce rentsta1048627 salary etc So if prices keep falling and falling (say of Nano car) then car marker will su1048627erlosses He has no motivation to expand business He wants to cut down his production costs by1048627ring some of the employees= less new jobs created= unemployment = social unrestIf prices of everything fall- then custom duty VAT excise duty service tax- their collection willalso decrease Then government has less money to spend on education healthcare socialsector defense law and order = poverty disease crimeby the wayTERM meaning Does RBI want itDEFLATION fall in the prices (and fall IN employment) NoDISINFLATION Fall in the prices but without causing unemploymentyes (while 1048627ghtingin1048627ation)STAGFLATIONstagnation + in1048627ationprices and wages risebut people canrsquot 1048627nd jobs companies canrsquot 1048627ndcustomersNoREFLATIONpolicy to stop the fall in price levels but without causingrise in the price levels (in1048627ation)yesWhat is monetary policy Explained Monetary Policy Rep SLR CRR Qualitative Tools httpmrunalorg201401banking-monetary-policy-quantitative-qualit2 of 29 152015 623 PM


























































































































































































































































































































































































































































































































































































































































































































































































































































Date post:	20-Dec-2015
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Monetary Policy

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