RBI AND MONETARY POLICY

Compiled bySanchit Pathak

Bhavya KeniaMohanish GaikwadKrishna Chukewad

Devesh KadamAditya Kakad

Abhiraj PhadnisAkshay RajputDhiraj Khadka

S.Y.BTech, Electrical Department ,V.J.T.I., Matunga, Mumbai-19.

Reserve Bank Of India(RBI) Established - in Calcutta -1st April, 1935

It was set up on the recommendations of the HILTON YOUNG COMMISSION.

It was started as a Share-Holders Bank - paid up capital of Rs. 5 crs - initially privately owned.

Reserve Bank Of India(RBI) 1937 - moved to Mumbai.

First bank to be Nationalised on 1st Jan,1949.

19 regional offices in India.

Structure of RBICENTRAL BOARD OF

DIRECTORS

APPOINTED BY GOI

GOVERNORS

APPOINTS

SUPPORTIVE BODIES OFFICES AND

BRANCHES

Governors

RBI: Supportive Bodies

BOARD OF FINANCIAL SUPERVISION(BFS)

TARAPORE COMMITTEE

CUSTOMER SERVICE DEPARTMENT

RBI: Offices And Branches

Reserve Bank Of India(RBI)

US $ 355,353.9 M

US $ 331,731.1 M

US $ 18,250.1 M

US $ 5,372.7 M

RBI: Functions

Supply Of Notes

Banker To Govt

Custodian Of Cash Reserves

Custodian Of Foreign Reserves

Clearing House Functions

RBISecond

Commercial Bank

One Commercial

bank

Credit Control Controls Creation Of Credit

Uses Qualitative and Quantitative tools.

Thereby controlling inflation.

Lender of Last Resort When commercial banks face financial

crisis or shortfall of cash(Low CR)

They approach other banks and if their demands are not met,

they approach to RBI as their

“LAST RESORT”

Monetary policy rests on the relationship between the rates of interest in an economy ,that is the price at which money can be borrowed ,and the total supply of money. (1)The supply of money.

(2)Availability of money ,and

(3)Cost of money or rate of interest to attain a set of goals.

MONETARY POLICY:

TYPES OF MONETARY POLICY

Tight Monetary Policy: “Tight monetary policy, tends to curb inflation by

contracting/reducing the money supply.

Expansionary /Easy monetary policy : “Easy monetary policy ,also called expansion

monetary policy ,tends to encourage growth by expanding the money supply.”

TOOLS OF MONETARY POLICYQuantitative Tools Open Market Operations Bank Rate Cash Reserve Requirement Liquidity Ratio Special Deposit

Qualitative Tools Credit rationing Credit ceiling Moral Persuasion Direct Action Advertisement

 

Price Stability Price stability refers to avoiding long term

inflation/deflation in order to bring the prices to a reasonable level.

In case of inflation ,the central bank(RBI) may tighten the monetary policy so as to decrease the supply of money and thus bring down the prices.

In case of deflation the RBI adopts a liberal monetary policy ,thus increasing the money supply causing a further increase in demand and normalizing the prices.

High Employmento The role of central bank is to implement a

monetary policy which creates a positive sentiment in the market thus promoting demands and a corresponding growth in manufacturing and services sector ,thus creating employment opportunities.

Economic Growth The Monetary Policy aims at improving the economic growth

of the nation.

The main measures involved in achieving economic growth include reducing the fiscal deficit, allowing a greater share in GDP to the manufacturing sector, allowing greater capital inflow in the economy increasing the forex reserves.

However developing economies may not see a steady growth in economy due to the Monetary Policy alone. The reasons for this include challenges offered on the supply side, lower participation of the citizens in the banking system ,financial conditions persisting in the world markets.

Quantitative Tools Of Monetary Policy(A) Cash Reserve Ratio (CRR) It is a fixed percentage of NDTL(Net Demand and Time

Liabilities) which banks have to deposit with the RBI so as to avoid a situation of bankruptcy.

The banks cannot use this money for investment purposes ,buying government securities or trading.

4%

(B) Statutory Liquid Ratio (SLR)

.

Every bank must possess a certain amount of liquid assets of their NDTL as regulated by the RBI.

The Banks have the provision to invest this funds in RBI approved securities, that is the banks can buy government securities, trade with commodities such as gold ,silver. Commercial banks usually do not buy foreign currencies because of market volatility.

22%

.

To combat inflation the RBI will increase the CRR and SLR ,causing a hike in interest rates ,thus bringing down lending by banks ,creating shortage of demand and stabilizing the prices.

Accordingly the decrease in interest rates will help combat deflation.

Repo Rate :

The Interest Rate at which the RBI lends money to its clients(All Banks/Government/NBFI) for a short term (Min Amount being Rs.5 crore) is the Repo Rate of RBI.

The banks are required to pledge their assets in the form of securities against the loan pertaining that these assets do not belong to the SLR maintained by the banks.

8%

Reverse Repo Rate : The Interest Rate at which the RBI may borrow

money from its client banks is called as the Reverse Repo Rate.

The RBI may rest some of its government securities against this loan.

7%

Bank Rate: Bank Rate is the interest rate at which the central

bank lends long term loans to commercial banks and public banks.

The banks are not required to pledge their assets with the RBI as a security against the loan.

8.25%

OPEN MARKET OPERATIONS (OMO) : The sale and purchase of government securities by

RBI refers to OPEN MARKET OPERATIONS.

Marginal Standing Facility (MSF) : Banks may borrow a small sum of money from RBI

(Min amount being Rs.1 Crore) for a short term referring to the MSF.

As a part of MSF banks may pledge their SLR assets with RBI against the loan.

The MSF can be availed only by the scheduled commercial banks.

Bibliography https://www.rbi.org.in/

https://en.wikipedia.org/wiki/Reserve_Bank_of_India

https://en.wikipedia.org/wiki/Monetary_policy_of_India

https://www.youtube.com/user/TheMrunalPatel

THANK YOU!!Compiled by-Sanchit PathakBhavya KeniaMohanish GaikwadKrishna ChukewadDevesh KadamAditya KakadAbhiraj PhadnisAkshay RajputDhiraj KhadkaV.J.T.I., Matunga, Mumbai-19.