Bank Rateminimum rate at which the central bank provides loans to commercial banksAlso called the discount rate. An increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate alter the cost of creditCurrent Bank rate 6%Cash Reserve Ratio Certain amount of banks deposits in cash with RBI. This % is cash reserve ratioThe current CRR requirement is 5 per cent. Statutory Liquidity RatioBanks to maintain 24 per cent of their demand and time liabilities in government securities and certain approved securities called SLR securitiesBuying/Selling of securities laid to Harshad Mehta scam(1992)Reposecured short-term (usually 15 days) loan by one bank to another against government securities. The borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.Current Repo Rate is 5%Reverse Reposame repurchase agreement(as Repo) from the buyer's viewpoint seller executing the transaction would describe it as a 'repo', while the buyer would describe it a 'reverse repo‘Current Reverse Repo rate is 3.5%CAR (Capital adequacy Ratio ):ratio of a bank's capital to its riskNational regulators track a bank's CAR to ensure banks can bear reasonable amount of loss and are complying with statutory Capital requirementscapacity of bank meeting the time liabilities and other risk Risk could be credit risk, operational risk, etcBank's capital is the "cushion" for potential losses, which protect the bank's depositors or other lendersBanking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking systemCAR is similar to leverageOpen Market Operationsimportant instrument of credit controlRBI purchases/sells securities in open market operations. During inflation, RBI sells securities to remove excess money in the market.During Deflation ,RBI purchases securitiesMoney Supply (M3)total volume of money circulating in the economycurrency with the public and demand deposits (current account + savings account) with the public. four concepts of measuring money supply:M1= currency with the public + demand deposits with the public + other deposits with the public. All coins and notes in circulation, and personal current accounts. M2= M1+ personal deposit accounts + government deposits + deposits in currencies other than rupee. M3= fixed deposits + savings deposits with post office + saving banks + M1Most Popular and known as Broad money conceptInflationInflation refers to a persistent rise in pricesToo much money and too few goodsScarcity of goods and many buyers, push the prices up Deflation is Converse of inflation persistent falling of prices. RBI can take two steps to reduce InflationReduce supply of money Increase interest rates
Monetary policy of rbi
CD Deshmukh Dr. D. Subbarao The First Indian Governor of Present Governer ofReserve Bank of India (RBI) Present Governer of
Monetary policy- MeaningThe part of the economic policy which regulates the level ofmoney in the economy in order to achieve certainobjectives.In INDIA,RBI controls the monetary policy. It is announcedtwice a year, through which RBI,regulate the price stabilityfor the economy.1.slack season policy April-September2.Busy season policy October-March
Importance of Monetary PolicyGross National Product (GNP) = C + I + G + XWhere: C = Private Consumption expenditure I = Private Investment Expenditure G = Government Expenditure X = Net ExportsC, I, X can be influenced by the monetary policy whichcan also influence the private consumption andinvestment spending and exports and imports.
OBJECTIVES∫Economic Growth∫Full Employment∫Flow of credit in all sectors of economy∫Price Stability
Exchange rate stabilityEquilibrium in balance of paymentsGreater equality in the distribution of income and wealth
Quantitative measures Bank rate Open market operations Cash reserve ratio (CRR) Statutory liquidity ratio (SLR)
Qualitative MeasuresΩ Rationing of creditΩ Moral SuasionΩ Direct ActionΩ Regulation in consumer creditΩ Changes in margin requirements
ConclusionAs articulated in the June 16th policystatement, RBI will continue to maintainliquidity conditions such that neither surplusliquidity dilutes the monetary policy stancenor large deficit chokes off fund flows toproductive sectors of the economy. Themarket at present has discounted the rise of25 bps in interest rates but global concernsstill continue to weigh on the market.