Effectiveness of tightening interest rates as a monetary tool for growing inflation in India
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Effectiveness of tightening interest rates as a monetary tool for growing inflation in India

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It discuss on how various factors affects the interest rates and how effective is the tightening of interest rates for growing inflation. This Presentation includes: What is inflation/Inflation, ...

It discuss on how various factors affects the interest rates and how effective is the tightening of interest rates for growing inflation. This Presentation includes: What is inflation/Inflation, Causes of Inflation, What is monetary policy, Relationship between monetary policy and inflation, What are the different monetary policy instruments- Bank rate, Cash Reserve Ratio(CRR), Statutory liquidity ratio(SLR), Repo rate and Reverse Repo Rate. It also includes steps taken by RBI to control inflation and changes in interest rates from 2010-2013.

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    Effectiveness of tightening interest rates as a monetary tool for growing inflation in India Effectiveness of tightening interest rates as a monetary tool for growing inflation in India Presentation Transcript

    • Effectiveness of tightening interest rates as a monetary tool on growing inflation in INDIA Presented by BHAVESH BHANSALI
    • What is Inflation?? A sustained increase in the general level of prices so that a given amount of money buys less and less.
    • Causes of Inflation  Inflation due to rise in real aggregate Demand.  Inflation due to contraction in Aggregate Supply.
    • What is Monetary Policy?? It is the process by which the central bank or monetary authority of a country regulates The supply of money  Availability of money and  Cost of money or rate of interest 
    • Monetary policy & Inflation When inflationary pressures build up: raise the short-term interest rate (the policy rate) which squeezes consumption and investment.
    • Monetary Policy Instruments Bank rate Cash Reserve Ratio Statutory Liquidity Ratio Repo rate Reverse Repo rate
    • Bank rate Rate at which Central Bank lends money to commercial Banks. Any increase in Bank rate results in an increase in interest rate charged by Commercial banks which in turn leads to low level of investment and low inflation
    • Cash Reserve Ratio It refers to the cash which banks have to maintain with RBI as certain percentage of their demand and time liabilities. An increase in CRR reduces the cash with commercial banks which results in low supply of currency in the market, higher interest rate and low inflation
    • Statutory Liquidity Ratio    It is the percentage of total deposits commercial banks have to invest in government bonds and other approved securities.  Objectives of SLR  To restrict expansion of Bank credit  To augment bank’s investment in government securities  To ensure solvency of banks
    • REPO RATE Repo rate is the interest rate at which the central bank lends funds to banks against pledging securities It enables collateralized short term borrowing and lending through sale/purchase operations in debt instruments
    • REVERSE REPO RATE The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk).
    • STEPS TAKEN BY RBI TO CONTROL INFLATION 
    • STEPS TAKEN BY RBI TO CONTROL INFLATION  RBI has raised the policy rate by 0.25 as it kept its focus on controlling the inflation.  RBI eased the liquidity through a reduction in the marginal standing facility rate, at which banks borrow from RBI by 0.75 basis to 9.5%  Increased the repo rate by 0.25 basis points to 7.5% from 7.25%.  Keeping the CRR unchanged, RBI reduced the minimum daily maintenance of CRR from 99% to 95% to induced liquidity in the system.
    • CHANGE IN INTEREST RATE IN INDIA