2. Presentation Agenda
Introduction
Monetary Policy of India
Major Operations
• Open Market Operations
• Cash Reserve Ratio
• Statutory Liquidity Ratio
• Bank Rate Policy
• Credit Ceiling
• Moral Suasion
• Marginal Standing Facility
• Repo Rate
• Reverse Repo Rate
Urjit R.Patel Committee Report
Conclusion
2Monetary Policy
3. Introduction
• Management of expectations.
• Relationship between the rates of interest in an economy and the total
supply of money.
• A policy is referred to as contractionary if it reduces the size of the money
supply or increases it only slowly, or if it raises the interest rate.
• An expansionary policy increases the size of the money supply more rapidly,
or decreases the interest rate.
• Usually, the short term goal of open market operations is to achieve a
specific short term interest rate target. For example, in the case of the USA
the Federal Reserve targets the federal funds rate.
3Monetary Policy
4. Monetary Policy of India
The central monetary authority is the Reserve Bank of
India (RBI). It is so designed as to maintain the price stability
in the economy.
Other objectives of the monetary policy of India, as stated by
RBI, are:
•Controlled Expansion
Of Bank Credit.
•Promotion of Fixed
Investment.
•Restriction of
Inventories.
•Promotion of
Exports and
Food
Procurement
Operations.
•Desired
Distribution of
Credit.
•Equitable
Distribution of
Credit.
•To Promote
Efficiency.
•Reducing the
Rigidity.
4Monetary Policy
5. Major Operations
Monetary operations involve monetary techniques which
operate on monetary magnitudes such as money supply,
interest rates and availability of credit aimed to
maintain Price Stability, Stable exchange rate, Healthy Balance
of Payment, Financial stability, Economic growth.
5Monetary Policy
6. Open Market Operations
Involves buying or selling of
government securities from or to the public
and banks.
The RBI sells government securities to
contract the flow of credit and buys
government securities to increase credit flow.
It makes bank rate policy effective and
maintains stability in government securities
market.
6Monetary Policy
7. Cash Reserve Ratio
It is a certain percentage of bank
deposits which banks are required to
keep with RBI in the form of reserves or
balances.
Higher the CRR with the RBI lower will be
the liquidity in the system and vice-
versa.
As per the suggestion by the Narshimam
committee Report the CRR was reduced
from 15% in the 1990 to 5 percent in
2002.
7Monetary Policy
9. Period CRR
April 1, 2011 – Jan 27, 2012 6.00 %
Feb. 03, 2012 – Mar. 09, 2012 5.50 %
Mar. 16, 2012 – Sep. 21, 2012 4.75 %
Sep. 28, 2012 – Nov. 2, 2012 4.50 %
Nov. 9, 2012 – Feb. 08, 2013 4.25 %
Feb. 15, 2013 – Till Date 4.00 %
9Monetary Policy
10. Statutory Liquidity Ratio
Every financial institution has to maintain a certain
quantity of liquid assets with themselves at any point
of time of their total demand and time liabilities.
These assets can be cash, precious metals, approved
securities like bonds etc.
There was a reduction of SLR from 38.5% to 25%
because of the suggestion by Narshimam Committee.
10Monetary Policy
12. Period SLR
April 1, 2011 – Aug. 10, 2012 24.00 %
Aug. 17, 2012 – Till Date 23.00 %
12Monetary Policy
13. Bank Rate Policy
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 banking system involves commercial and co-operative banks, Industrial
Development Bank of India, EXIM Bank, and other approved financial institutes.
The bank rate, also known as the discount rate, is the rate of interest charged by
the RBI for providing funds or loans to the banking system.
13Monetary Policy
15. Credit Ceiling
RBI issues prior
information or
direction that
loans to the
commercial banks
will be given up to
a certain limit.
Commercial bank
will be tight in
advancing loans to
the public.
They will allocate
loans to limited
sectors. Few
example of ceiling
are agriculture
sector advances,
priority sector
lending.
15Monetary Policy
16. 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.
16Monetary Policy
17. Marginal Standing Facility
It refers to the rate at which the scheduled banks can borrow
funds overnight from RBI against government securities.
• MSF is a very short term borrowing scheme for scheduled commercial banks.
Banks may borrow funds through MSF during severe cash shortage or acute
shortage of liquidity.
Under MSF, banks can borrow funds overnight up to 1% (100
basis points) of their net demand and time liabilities (NDTL) i.e.
1% of the aggregate deposits and other liabilities of the banks.
• Hiking MSF rate makes borrowing expensive for a bank which means loans
become expensive for individual and corporate borrowers and this in turn
translates to lesser availability of the rupee.
17Monetary Policy
19. Repo Rate
It is the rate at
which RBI lends
to the
commercial
banks generally
against
government
securities.
Banks borrow
funds to meet
the gap between
the demand they
are facing for
money (loans)
and how much
they have on
hand to lend.
Reduction in
Repo rate helps
the commercial
banks to get
money at a
cheaper rate and
increase in Repo
rate discourages
the commercial
banks to get
money as the
rate increases
and becomes
expensive.
19Monetary Policy
20. Period Repo Rate
April 1, 2011 – April 29, 2011 6.75 %
May 06, 2011 – June 10, 2011 7.25 %
June 17, 2011 – Jul. 22, 2011 7.50 %
Jul. 29, 2011 – Sep. 09, 2011 8.00 %
Sep. 16, 2011 – Oct. 21, 2011 8.25 %
Oct. 28, 2011 – April 13, 2012 8.50 %
April 20, 2012 – Jan. 25, 2013 8.00 %
Feb. 01, 2013 – Mar. 15, 2013 7.75 %
Mar. 22, 2013 – April 26, 2013 7.50 %
May 03, 2013 – Sep. 13, 2013 7.25 %
Sep. 20, 2013 – Oct. 25, 2013 7.50 %
Nov. 01, 2013 – Jan. 24, 2014 7.75 % 20
Monetary Policy
22. Reverse Repo Rate
If banks have excess amount with them, they can park
the surplus money with RBI and earn interest on this.
The interest on such amount is called Reverse Repo
Rate.
RBI will increase this rate if it wants to reduce
liquidity in the system as banks will be tempted to
park money with RBI rather than lending, if this rate
is high.
Current Reverse Repo Rate – 7.00 %
22Monetary Policy
23. Urjit R.Patel Committee Report
• It has proposed a new framework for
the monetary policy.
• It targets Consumer Price Index as the
key measure of inflation.
• The RBI has adopted it recently.
Monetary Policy 23
24. Conclusion
Monetary Policy is one of the important
tools that an economy uses to maintain
stability.
But monetary policy alone is not enough.
Equally effective Fiscal Policy has to be in
place to get the maximum out of the
economy.
24Monetary Policy
