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Reserve Bank Of India The Central Bank Of India -RBI. Established In 1935 With a Share Capital Of Rs. 5 crores on the basis of the Hilton Young Commission. The Share Capital was Divided into Rs. 100 each fully paid up which was entirely owned by private shareholders in the beginning. RBI was nationalised in 1949. The govt. held shares of normal value of Rs. 2,20000.
What is Monetary Policy? Shaw defines monetary policy as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost.., of money. Monetary policy is essentially a programme of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving the objectives of general economic policy
Objectives Of Monetary Policy Maintain price Stability. Flow of credit to the productive sectors of the economy. Stability for the national currency. Growth in employment and income. To promote and encourage economic growth in the country.
INSTRUMENTS OF MONETARY POLICY SLR Open marketBank rate QUANTITATIVE operations Cash Reserve Ratio
Bank Rate policy Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills. Today’s approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort. Present rate is 6%.
Increase in bank rate Decrease in bank rate Increase in bank rate Decrease in bank rate charge by the central bank charge by the central bank on its advance to on its advance to commercial bank. commercial bank. Commercial bank decrease Commercial bank increase the rate of interest on their the rate of interest on their loan. loan. Demand for the credits and Demand for the credits and loan increase. loan decrease. Flow of the money increase Flow of the money in the economy decrease in the economy Use in depression situation Use in inflationary situation Effect of Bank rate
GROWTH DURING THE LAST FISCAL YEAR Chart Title Feb-10 Feb-11 26.5 24.2 24.4 22.85 20.09 18.34 15.92 15.43 16.23 4.11
Open Market operationIts include the sales and purchase by the central bank of …. Assets Foreign exchange Gold Government securities Company securities
In the inflationary situation In the depressionary situation Central bank decrease Central bank increase the money supply. the money supply. Central bank sale out the Central bank purchase securities to commercial the securities from the bank and control money commercial bank. supply. Use of Open Market operation
Cash Reserve Ratio Commercial bank has to keep a certain percentage of his deposits with central bank. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country. Presently it is 6%.
STATUARY LIQUIDITYRATIO Commercial bank is to keep a certain percentage of his deposit as liquid asset. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country. At present it is 24%.
In Inflationary situation In Depressionary situationo Increased the o Decreased the percentage of cash percentage of cash reserve ratio and reserve ratio and Statutory liquidity ratio Statutory liquidityo It reduces the supply ratio of money in an economy o It increases the supply of money in an economy Use of C.R.R. & S.L.R
Qualitative Instruments Credit Rationing: Under this two measures are adopted:• Imposition of upper limits on the credit available to large industries and firms.• Charging a higher interest rate on bank loans beyond a certain limit. Change In Lending Margins: The banks provide loans only upto a certain percentage of the value of the mortgaged property. The gap between the value of the mortgaged property and amount advanced is called ‘lending margin’.
Moral Suasion:• The moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country. Direct controls:• Where all other methods prove ineffective, the monetary, authorities resort to direct control measures with clear directive to the banks carry out their lending activity in a specified manner.
Highlights of Monetary Policy2011-2012 The Reserve Bank announces the following policy measures: The Bank Rate has been retained at 6.0 percent. It has been decided to increase the repo rate from 8.25 per cent to 8.50 per cent The reverse repo rate is increased from 7.25 per cent to 7.50 per cent. It has been decided to increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent. The SLR is announced 24%.
Limitations Of Monetary Policy The time lag :• The first and the most important limitation in the effective working of monetary policy is the time lag. i.e. time taken in chalking out the policy action, its implementation and working time. Problem in forecasting :• The formulation of an appropriate monetary policy requires a reliable assessment of the magnitude of the problem-recession or inflation- as it helps in determining the appropriate policy measures.
Non-banking Financial Intermediaries:• The structural change in the financial market has also reduced the scope of effectiveness of monetary policy. Under Development of money and capital markets :• The effectiveness of monetary policy in less developed countries is reduced considerably because of the underdeveloped character of their capital and money markets.
CONCLUSION Economy is expected to develop at 8.2 percent in 2011-12. Agriculture grew at 6.6 percent in 2010- 11. Likely to nurture at 3.0 percent in 2011-12. Industry grew at 7.9 percent in 2010-11. Likely to nurture at 7.1 percent in 2011- 12. Services grew at 9.4 percent in 2009-10. Likely to nurture at 10.0 percent in 2011- 2012.