Monetary Policy


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Monetary Policy

  1. 1. 1Monetary Policy
  2. 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. 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. 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. 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. 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. 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
  8. 8. 8Monetary Policy
  9. 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. 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
  11. 11. 11Monetary Policy
  12. 12. Period SLR April 1, 2011 – Aug. 10, 2012 24.00 % Aug. 17, 2012 – Till Date 23.00 % 12Monetary Policy
  13. 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
  14. 14. Current Bank Rate – 9.00 % 14Monetary Policy
  15. 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. 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. 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
  18. 18. 8.20 8.30 8.40 8.50 8.60 8.70 8.80 8.90 9.00 9.10 Apr. 12 '13 Mar. 14 '14 Mar. 21 '14 Mar. 28 '14 Apr. 4 '14 Apr. 11 '14 Marginal Standing Facility (MSF) Rate Marginal Standing… 18Monetary Policy
  19. 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. 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
  21. 21. CRR & Repo Rate 21Monetary Policy
  22. 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. 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. 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
  25. 25. Thank You 25Monetary Policy