2. Reserve Bank Of India
The Reserve Bank Of India (RBI) is the central banking
system of India and control the monetary policy of the
rupee.
The institution was established on 1stApril, 1935 and plays
an important part in the development strategy of the
government.
The inaugural officeholder was the British banker Osborne
Smith, while C. D. Deshmukh was the first Indian
governor. The position is currently held by Urjit Patel, who
took over from Raghuram Rajan on 4 September 2016.
3. Role of RBI
India’s monetary authority
Supervisor of financial system
Issuer of currency
Manager of foreign exchange reserves
Banker and debt manager to Government
Banker to bank
Developmental functions
Research, data and knowledge sharing since 75 years:
4. Monetary Policy
The process by which the monetary authority of a
country controls the supply of money.
Monetary policy refers to the use of instruments under
the control of the RBI to regulate the availability, cost
and use of money and credit.
The goal: achieving specific economic objectives, such
as low and stable inflation and promoting growth.
5. Objective
Objective are classified in two aspects :
Under Developed countries
Developed countries
To have high aggregate demand without inflation
Eradicate inflationary and deflationary gap
High research/ further development
Providing assistance to other countries
Gaining monetary control over others
6. Under Developed Countries
To achieve full employment
To have high Efficiency
To have large scale of resources mobilization
To increase Export
To have high investment
To provide price and exchange stability
To have efficient allocation and utilization of resources
To raise living standards
7. Tools of Monetary Policy
Quantitative tools:
Open market Operations
Bank rate
Cash Reserve Requirement
Liquidity ratio
Special deposit
Qualitative tools:
Credit rationing
Credit ceiling
Moral Persuasion
Direct action
8. Process of Monetary policy Formulation
Internal Work Process
Technical analysis, coordination, horizontal
management
Monetary Policy:
A consultative and participative process
Central
Board of
Directors
Reviews the
stance of
monetary
policy
Board for
Financial
supervision
reviews
supervisory data
and financial
stability issues
Committee of the
Board meets weekly
to review the
monetary, economic,
financial condition
and advice
appropriately
Periodic
consultations
with the
Government
mainly Ministry
of finance to
ensure
coordination
Resource
management
discussions
with select
major banks
Periodic
consultations
with
academics and
market
Analyses strategies
on an ongoing basis:
reviews growth and
inflation situation
and macroeconomic
projections
Market
information,
economic and
statistical
analysis
Financial
Markets
Committee
Technical Advisory
Committees on
Monetary Policy:
Advises on the stance
of monetary policy
Monetary policy
strategy Meetings
Reviews and manages
daily market operation
and adopts strategies
9. Target for Monetary Policy
Used to control
Set to Achieve
Tools for Monetary Policy
Open Market Operations
Discount Loans
Changes in Reserve Requirement
Goals for Monetary Policy
High Employment and Growth
Price Stability or low Inflation
Financial Market and Interest
Rate stability
Target for Monetary
Policy
Money supply
Interest Rates
10. Open Market Operations: Buying securities
from commercial bank
• Gives up
securities
Bank
• Pays the
bank
Fed/ CB
• Increase
reserves
Bank
11. Open Market Operation:Buying securites from
public
• Gives up
securities
Public
• Pays
Fed/CB
• Deposits
in bank
Public
• Increase
reserves
Bank
12. Open Market Operation : Selling securities to
commercial bank
• Gives up
securities
Fed/CB
• Pays
Bank
• Decreases
reserves
Bank
13. Open Market Operation : Selling securities to public
• Gives up
securities
Fed/ CB
• Pays by
check from
bank
Public
• Decreases
reserves
Bank
14. Different interest rates prevalent in India
Bank rate: The rate at which RBI lends money to domestic
banking system.
Call Money rate : The rate at which commercial bank borrows
money from other commercial banks for a short period
Prime Lending rate : The rate at which the commercial banks
can provide credit to industries or business
Repo and Reverse Repo rate : The interest rate at which RBI
provides loan to commercial banks is called Repo rate(rate
6.5%). The rate at which RBI takes short term credit is Reverse
Repo rate(rate 6%).
Deposit rate: The rate of interest at which the customers are paid
interest on their bank deposits.
15. Different interest rates prevalent in India (cont..)
Bond rate : To meet expenses for the development,
Government issues the bond maturing in definite period at a
definite rate.
Cash Reserve Ratio: banks in India are required to hold a
certain proportion of their deposits in the form of cash with
RBI. This minimum ratio is known as the CRR.(rate 4%)
Statutory Liquidity Ratio: The minimum percentage of
deposits that the bank has to maintains in form of gold, cash,
or other approved securities is known as SLR. (rate 21%)
16. Limitation of Monetary Policy
Monetary policy cannot change long-term growth.
There is no long term tradeoff between growth and
inflation
Monetary policy can deliver low and stable inflation,
and thereby reduce the volatility of the business cycle.
It cannot really predict when inflationary pressures
builds up