MONETARY POLICY OF RBI

MEANING OF MONETARY POLICY

• Monetary policy involves “the management of a nation’s money, credit and banking system by the nation’s central bank”. It influences the supply, cost and availability of money and in turn the economic activities.

• Monetary policy according to Prof. H. Johnson is “ a policy employing the central bank’s control of the supply of money as an instrument for achieving the objectives of general economic policy.

OBJECTIVES

• Economic growth

• Price stability

• Full employment

• Exchange stability

• Balance of payments equilibrium

• Neutrality of money

CONFLICT AMONG OBJECTIVES

• Growth and stability

• Growth and full employment

• Full employment and balance of payments

• Economic growth and exchange stability

• Full employment and price stability

INSTRUMENTS AND TECHNIQUES OF MONETARY CONTROL

• They are broadly grouped into

A. Quantitative methods:• Bank rate• Open market

operations• Variable reserve

requirements

B. Qualitative or selective credit control

• Margin requirements• Consumers credit

regulation• Directives• Direct action• Rationing of credit

BANK RATEMEANING

• Bank rate is the rate of interest charged by the central bank to the commercial bank, while advancing money against

(a) eligible securities(b) rediscounting eligible billsProviding credit to the banks is

a part of the central bank’s activities under its ‘lender of last resort’ function.

LIMITATIONS• Well developed and

organized money market• Co-operation of commercial

banks• Impact on investment cost• Frequent changes are

undesirable• Timings and rate of change

OPEN MARKET OPERATIONS (OMO)MEANING

• Under the OMO the central bank sells and purchases government securities. The participation in the sale and purchase operations of securities by the Central Bank is open to all - people, banks and other financial and non-financial concerns.

• Bank rate and OMO

LIMITATIONS

• Developed money market• Co-operation of banks• Stable security prices• Demand for and supply of

securities• Stable cash reserves

VARIABLE RESERVE REQUIREMENTS (VRR)

• VRR includes two components

(a) Cash reserve ratio(b) Statutory liquidity ratioCASH RESERVE RATIO (CRR) The commercial banks are

required, either by convention or by law, to keep a certain percentage of their deposits as cash reserves with the central bank.

LIMITATION• Frequent changes not

advisable• Effect is not uniform• Disturbs the security

market• Reduces the income of

commercial banks• Not very effective in

depression

STATUTORY LIQUIDITY RATIO (SLR)

• Under this method the commercial banks will have to maintain a minimum holdings of short-term government securities and other liquid assets in addition to the cash reserves. This prevents the commercial banks from discounting the securities whenever they want to expand their lending. It makes the VRR and OMO more effective.

VRR AND OMO• VRR has immediate effect on banks than OMO. There is no time lag

between decision and action.• VRR does not depend on co-operation of commercial banks or availability of

securities for sale and purchase.• VRR affects all the banks. OMO affects only those banks which deal in

securities.• OMO affects all the institutions, banks and non-bank financial institutions.

VRR influences only the banks.• OMO affects the bank reserves as well as the market rate of interest. VRR

directly affects the reserves and not so much the rate of interest.• Banks can defeat the objectives of an increase in VRR by resorting to the

discounting of securities. There is no such compulsion under OMO.• VRR affects the smaller banks more than the larger banks. OMO is non

discriminatory.• VRR disturbs the working of commercial banks far more than OMO.• OMO is more effective in deflation and depression than VRR.

SELECTIVE CREDIT CONTROL (SCC)

• OBJECTIVES• To discriminate against the non-essential lines of

economic activities and check the flow of funds in those directions.

• To discourage consumer demand for credit for non-essential items.

• To encourage exports by granting concessional credit.• To control the supply of money and check the price

level.• To promote economic growth with stability.

INSTRUMENTS OF SELECTIVE CREDIT CONTROL

• MARGIN REQUIREMENTS• Margin requirements are imposed to check the

credit for speculate activities. Government securities, shares and essential commodities are more prone to speculations. Prices of these items are influenced by indulging in speculative purchases with the help of bank loans. Higher margin is imposed to discourage such loans.

CONSUMER’S CREDIT REGULATION

• Consumer’s durables are very often purchased with the help of bank loans. Excess as well as insufficient demand for these items disturb the production. Excess demand also leads to speculation and black marketing. To avoid these problems consumer credit is required to be regulated.

DIRECTIVES

• The Central Bank issues directives written or oral to the commercial banks to follow certain line of action. Commercial banks may be asked to be rigid or liberal in granting loans or follow any other fiscal discipline demanded by the situation. The success of this method depends on the prestige and power of the Central Bank.

DIRECT ACTION

• The Central Bank may resort to direct action against the defaulting banks. Action may include

(1) Denial of financial accommodation,(2) Imposing a penal rate interest on discounting

facility and (3) Any other action which the central bank

deems fit.

RATIONING OF CREDIT

• Under this method the central bank may impose a ceiling on loans and advances. Such ceilings may be on aggregate lending or specific. Restrictions also may be imposed on discounting facilities for individual bank.

MORAL SUASION

• It refers to the various forms of appeals of the Central Bank to the commercial banks to follow a particular line of action. Appeals of the Central Bank may take the form of calling meeting of the heads of the commercial banks, letters or circulars, oral request, discussion or any other informal ways of conveying the Central Bank’s desire to commercial banks to implement the credit policy more rigorously.

LIMITATIONS OF SELECTIVE CREDIT CONTROL

• Limited application• Arbitrary• In-effective administration• No follow-up action• Restricts individual freedom• Political pressure

IMPORTANCE OF SELECTIVE CREDIT CONTROL

• IN DEVELOPING COUNTRY• Distinguishes between essential and non-essential

economic activities.• Discriminates in favour of essential activities.• Encourages the flow of funds to the priority sector.• Checks inflation without disturbing the functioning

of the entire economy.• Provide incentive for selected activities like exports.• Directs savings in the desired lines of investment.

LIMITATIONS OF MONETARY POLICY

• Optimism Of Inflation• Pessimism Of

Depression• Time-lag• Non-bank Financial

Intermediaries• Higher Cash Reserve Of

Commercial Banks

In Developing Countries Face Additional Problems.

• Unorganized Money Market• Non-monetized Sector• Underdeveloped And

Narrow Money Market• Lack Of Coordination

Between Monetary And Fiscal Policy

• Public Debt Policy• Ineffective Implementation

RBI • GOVERNOR

RAGHURAM.RAJAN• LIST OF DEPUTY GOVERNOR

H. R. KhanUrijit . PatelR . Gandhi

S. S. Mundra

https://rbi.org.in/Home.aspx

RBI’S MONETARY POLICY

• RBI currently pursues its monetary with main objective of ‘Growth with Price stability’. The Reserve Bank of India (RBI) uses the monetary policy to manage liquidity or money supply in a manner that balances inflation and at the same time aids growth. After the cut on 29 September, the RBI has now infused a 125-basis point repo rate cut in 2015, which is now expected to be translated into lower lending and deposit rates from banks. Here’s a look at the tools RBI uses to manage monetary policy.

http://www.livemint.com/Money/BFvKL47eat3BzCy2RYVO7O/Monetary-policy-tools-that-RBI-uses.html

REPO AND REVERSE REPO RATE• Repo is a transaction wherein securities are sold by the RBI

and simultaneously repurchased at a fixed price. This fixed price is determined in context to an interest rate called the repo rate. The transaction is relevant for banks; when they need funds from the RBI, the central bank repurchases the securities. The higher the repo rate, more costly are the funds for banks and hence, higher will be the rate that banks pass on to customers. A high rate signals that access to money is expensive for banks; lesser credit will flow into the system and that helps bring down liquidity in the economy. The reverse is the reverse repo rate, which banks use to park excess money with RBI.

http://www.livemint.com/Money/BFvKL47eat3BzCy2RYVO7O/Monetary-policy-tools-that-RBI-uses.html

RECENT CHANGES IN RBI’S MONETARY MANAGEMENT

• Delinking monetary policy form budget deficit• Reduction in reserve requirements• Deregulation of administered interest rate system• Provision of micro finance• Signaling rate• Greater market orientation • Selective measures of credit control• External sector

EVALUATION OF RBI’S MONETARY POLICY

• Existence of unorganized money market• Strong link with fiscal policy• Limited coverage• Unable to control inflation• Black money• Preference for cash transactions• Ineffectiveness of bank rate

MONETARY POLICY OPERATIONS• 2011-2012

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1040

2012-2013

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1081

2013-2014

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1121

2014-2015

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1149#c1

CURRENT RATE (7 FEB 2016)

• POLICY RATE• Repo rate: 6.75%• Reverse repo rate: 5.75%• Marginal standing facility

rate: 7.75%• Bank rate: 7.75%• RESERVE RATES• CRR: 4%• SLR: 21.5%

• EXCHANGE RATE• INR/ 1USD: 67.6365• INR/ 1 Euro: 75.7326• INR/ 100 Jap . Yen: 57.9100• INR/ 1 Pound Sterling: 98.4720• LENDING/DEPOSIT RATES• Base rate: 9.30% - 9.70%• Savings deposit rate: 4.00%• Term deposit rate: 7:00% -

7.90%

https://rbi.org.in/Home.aspx

MARKET TRENDS• MONEY MARKET• Call rates: 5.60% - 6.85%• GOVERNMENT SECURITIES MARKET• 7.25% GS 2025: 7.8354%• 91day T-bills: 7.3521%• 182day T-bills: 7.2308%• 364day T-bills: 7.27%• CAPITAL MARKET• S&P BSE Sensex: 24338.83• Nifty 50: 7404.0

https://rbi.org.in/Home.aspx

CONCLUSION

• For an effective anti-cyclical monetary policy, bank rate, open market operations, reserve ratio and selective control measures are required to be adopted simultaneously. But it has been accepted by all monetary theorists that (i) the success of monetary policy is nil in a depression when business confidence is at its lowest ebb; and (ii) it is successful against inflation. The monetarists contend that as against fiscal policy, monetary policy possesses greater flexibility and it can be implemented rapidly.

http://www.yourarticlelibrary.com/policies/monetary-policy-meaning-objectives-and-instruments-of-monetary-policy/11134/

ACKNOWLEDGEMENT

• We would like to express my special thanks of gratitude to our teacher Rucha ma’am for allowing us to do the project.

• We came to know about so many new thing. We am really thankful them.

• Secondly we would like to thanks our family for their support.

BIBLOGRAPHY• Reserve Bank of India Act, 1934• https://rbi.org.in/scripts/FS_Overview.aspx?fn=2752• http://www.livemint.com/Money/BFvKL47eat3BzCy2RYVO7O/Mo

netary-policy-tools-that-RBI-uses.html•

https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1149#c1

• https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1121• https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1081• https://rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1040• https://rbi.org.in/Home.aspx• http://www.yourarticlelibrary.com/policies/monetary-policy-mean

ing-objectives-and-instruments-of-monetary-policy/11134/• MACRO ECONOMICS S.Y.B.A BOOK (MANAN PRAKASHAN)

MADE BY

RUCHITA SANGARE

• CLASS : F.Y.B.M.S

THANK YOU

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