Monetary and financial reforms

1. INDIAN ECONOMY: A STABLE, LARGE BUT SLOW.

2. MALAVIYA NATIONAL INSTITUTE OF TECHNOLOGY JAIPUR
IMPACT OF MONETARY & BANKING REFORMS POST LIBERALSIATION
2014-2015
Presented by
Aakash Bhatia 2011UCH4002
Gagan Gothwal 2011UCH1023
Kuldeep Singh Bhati 2011UCH1759
Mayank Mehta 2011UCH1590

3. OVERVIEW
 MONETARY POLICY & ITS OBJECTIVE
 TRADE OFF IN MONETARY GOALS
 EVOLUTION OF MONETARY POLICY
 INSTRUMENTS OF MONETARY POLICY IN INDIA
 MONETARY REFORMS
 BANKING REFORMS
 OUTCOMES OF THESE REFORMS
 DEMERITS

4. MONETARY POLICY & ITS OBJECTIVE
Monetary policy is defined as comprising of such measures which lead to
influencing the cost, volume and availability of money and credit so as to achieve
certain set objectives.
The main objectives or goals of monetary policy are:-
(1) Price stability
(2) Economic growth
(3) Full employment and
(4) Maintenance of balance of payments equilibrium

5. WHY THESE OBJECTIVES ?
 Price Stability
Fluctuations in prices bring about uncertainty and instability in the
economy.
Price stability keeps the value of money stable, eliminates cyclical fluctuations,
brings economic stability, helps in reducing inequalities of income and wealth,
secures social justice and promotes economic welfare.
Innovations may reduce the cost of production but a policy of stable prices may
bring larger profits to producers at the cost of consumers and wage earners.
 Economic Growth
Economic growth implies raising the standard of living of the people, and
reducing inequalities of income distribution.

6.  Full Employment
Full employment is a situation in which everybody who wants to work gets work.
Full employment can be achieved in an economy by following an expansionary
monetary policy.
 Balance of payment’s Equilibrium
A balance of payments deficit reflects excessive money supply in the economy. As
a result, people exchange their excess money holdings for foreign goods and
securities.

7. TRADE OFF IN MONETARY GOALS
 Full Employment and Economic Growth
 Economic growth and Price stability
 Full employment and price stability
 Full employment and Balance of payments

8. EVOLUTION OF MONETARY POLICY
 The evolution of monetary policy framework in India can be seen in phases.
 In the formative years during 1935–1950, the focus of monetary policy was to
regulate the supply of and demand for credit in the economy through the bank
rate, reserve requirements and open market operations (OMO).
 In the development phase during 1951–1970, monetary policy was geared towards
supporting plan financing. This led to introduction of several quantitative control
measures to contain consequent inflationary pressures. While ensuring credit to
preferred sectors, the bank rate was often used as a monetary policy instrument.
 During 1971–90, the focus of monetary policy was on credit planning. Both the
statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) were used to
balance government financing and the attendant inflationary pressure.

9. INSTRUMENTS OF MONETARY POLICY IN
INDIA
QUANTITATIVE TOOLS
 BANK RATE
The interest rate at which a nation's central bank lends money to domestic
banks.
Often these loans are very short in duration.
Bank Rate serves as a reference rate for other rates in the financial markets.
From 2004-10, it was kept constant at 6 per cent.
Bank Rate is 8.75% which is in effect from 15 January 2015.

10.  CASH RESERVE RATIO (CRR)
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total
deposits of customers, which commercial banks have to hold as reserves
either in cash or as deposits with the central bank.
CRR is set according to the guidelines of the central bank of a country.
The Narasimham Committee in its report submitted in November 1991, was
of the view that a high cash Reserve Ratio (CRR) adversely affects the bank
profitability.
Thus, government decided to reduce the CRR over a four year period to a
level below 10 per cent.
As per the policy announced on April 24, 2010, the CRR in India was 6.00 per
cent.
Currently it is at 4%.

11.  STATUTORY LIQUIDITY RATIO (SLR)
Statutory liquidity ratio (SLR) is reserve requirement that the commercial banks in
India requires to maintain in the form of gold, cash or government
approved securities before providing credit to the customers.
There are two reasons for raising statutory liquidity requirements by the Reserve
Bank of India:
(1) To reduce commercial bank’s capacity to create credit and thus help to check
inflationary pressures.
(2) To make larger resources available to the government.
Currently SLR is 21.50%.
0
5
10
15
20
25
30
35
40
45
April,1992 Jan, 1993 Sept, 1993 Oct, 1993 Sep,1994 Oct,1994 Oct,1997 Nov,2008 Nov,2009
SLR Rate(%)
SLR Rate(%)
Source : RBI Publications

12.  OPEN MARKET OPERATIONS
The open market operation policy is that policy by which the central bank contracts
or expands the credit by sale or purchase of securities in the open market.
Open market operations is an effective instrument for liquidity management in
economy.
 REPO RATE
Bank sells the security to RBI to raise money. When banks sell security , banks
promise to buy back the same security from RBI at a predetermined date with an
interest at the rate of REPO .
Currently Repo rate is 7.75%.

14. 0
2
4
6
8
10
12
14
16
18
Repo Rate (%)
Repo Rate (%)
Source : RBI Publications

15.  REVERSE REPO RATE
Reverse repo rate is the rate at which banks park their short-term excess liquidity
with the RBI.
The RBI uses this tool when it feels that there is too much money floating in the
banking system.
An increase in the reverse repo rate means that the RBI will borrow money from the
banks at a higher rate of interest.
Currently reverse repo rate is 6.75%.
0
2
4
6
8
10
12
14
16
18
Reverse Repo Rate (%)
Reverse Repo Rate (%)
Source: RBI Publications

17. QUALITATIVE TOOLS
While the quantitative tools controls relate to the total volume of credit (changing
High-powered money) and the cost of credit, qualitative tools operate on the
distribution of total credit.
Measures can be used to encourage greater channelling of credit into particular
sectors, as is being done in India in favour of designated priority sectors, is the
positive aspect.
 Varying Margin Requirement
It is an important qualitative method of credit control. This method was initially
used in America in 1929. The banks keep a certain margin while lending money
against securities.
Banks do not advance money to the full value of the security pledged for the loan. .

18.  Regulation of Consumer Credit
It helps to regulate the terms and conditions under which the credit repayable in
instalments could be extended to the consumers for purchasing the durable goods
The central bank can control the consumer credit
1. by changing the amount that can be borrowed for the purchase of the consumer
durables and
2. by changing the maximum period over which the instalments can be extended.
 Rationing of Credit
The central bank can also adopt the rationing of credit as a selective measure.
Under this method, the central bank can fix a limit for the credit facilities available
to commercial bank.
This is to control and regulate the purpose for which the credit is granted by the
banks.

19.  Direct Action
Direct action refers to direct dealings with the individual bank which adopt policies
against the policies of the central bank.
Under this system,
(1) the central bank may refuse to rediscount the bills of exchange of the
commercial banks .
(2) it may charge a penal rate of interest over and above the bank rate and
(3) the central bank may refuse to grant more credit to the particular banks.
 Moral Persuasion
Moral suasion means advising, requesting and persuading the commercial banks to
co-operate with the central bank in implementing its general monetary policy.

20. MONETARY REFORMS
 Reduced CRR and SLR
 reduced from the earlier high level of 15% plus incremental CRR of 10.5% to
current 4% level.
 The SLR is also reduced from early 30.5% to current minimum of 23% level.
 This has left more loanable funds with commercial banks.
 Increased Micro Finance
 The RBI has focused more on the SHG (self-help group) to strengthen the Rural
Finance.
 Micro Finance Institutions (MFIs) are kept under priority sector lending, for
instance Urban Co-operative banks. It comprises small and marginal farmers,
Agriculture and Non-Agriculture Labour, Artisans and Rural sections of the society.
 Now, still only 30% of the target population has been benefited.

21.  Fixing prudential norms
 For professionalism in its operations, the RBI fixed prudential norms
for commercial banks.
 It includes recognition of income sources, classification of assets,
provisions for bad-debts, maintaining international standards in
accounting practices etc.
 It helped banks in reducing and re-structuring non-performing assets
(NPAS).
 Introduction of CRAR
 started in 1992.
 Almost all the banks in India has reached the CAR above the statutory
level of 9%.

22.  Diversification of banking
 banks have started new services and new products.
 Some bank have established subsidiaries in Merchant Banking, mutual funds,
insurance, venture capital etc.
 New generation banks
 Bank such as ICICI Bank, UTI Bank have given a big challenge to the Public Sector
Banks leading to a greater degree of competition.
 Operational autonomy
 satisfies the CAR then freedom in opening new branches.

23.  Improved profitability and efficiency
 happened due to reduced, non-performing loans, use of technology, use of
computers and some other relevant measures adopted by the govt.
 Changes in accordance to the external reforms
 comprises various controls on imports, reduce tariffs, etc.
 The Monetary Policy has shown the impact of liberal inflow of the foreign capital
and its implication on domestic money supply

24. BANKING REFORMS
Banking Reforms in India: Phase I
 Lowering SLR And CRR
 Prudential Norms
 Capital Adequacy Norms (CAN): In April 1992 RBI fixed CAN at 8%.
 Deregulation Of Interest Rates
 Recovery Of Debts
 Competition From New Private Sector Banks
 Phasing Out Of Directed Credit
 Access To Capital Market
 Freedom Of Operation
 Local Area banks (LABs)
 Supervision Of Commercial Banks

25. Banking Reforms in India: Phase II in 1998
 New areas for bank financing have been opened
 New Instruments :- For greater flexibility and better risk management
 Strengthening Technology
 Increase Inflow Of Credit
 Increase in FDI Limit: From 49% to 74%
 Adoption Of Global Standards
 Mergers And Amalgamation
 Guidelines For Anti-Money Laundering
 Base Rate System Of Interest Rates
 Managerial Autonomy

26. OUTCOMES OF THESE REFORMS
 Business per Employee (Rs. in Lakhs)
 Profit per Employee (Rs. In Lakh)
Source : New Century Publications, 2008
Source : New Century Publications, 2008

27. 0
2
4
6
8
10
12
14
16
18
20
Lending Rate after 1991 (%)
Source: RBI Publications

28. 0
2
4
6
8
10
12
14
Deposit Rate(%) after 1991
Source: RBI Publications

29. ANNUAL GROWTH RATE
0
2
4
6
8
10
12
Annual growth rates of GDP
GDP
Source: RBI Publications

30. SECTORIAL GDP
Agricultur
e, 31.4
Industry,
19.8
Service,
48.8
1990-01
Agriculture
24%
Industry
20%
Service
56%
2000-01
Agriculture
, 14.4
Industry,
27.9
Service,
57.7
2010-11
Agriculture,
12
Industry,
28.2Service,
59.8
2014-15
forecast
Source: RBI Publications

31. FISCAL DEFICIT

32. FII’S
Source: RBI Publications

33. DEMERITS
 Monetary Policy fails to tackle Budgetary Deficit-The higher level of budget deficit has made
Monetary Policy ineffective. The automatic monetization of deficit has let to high Monetary
expansion.
 The coverage area of Monetary Policy is limited-Monetary Policy covers only commercial
banking sector. Other non-banking institutions remains untouched. It limits the effectiveness
of the Monetary Policy in India.
 Money market is not organized-There is a huge size of money market in our country. It does
not come under the control of the RBI. Thus any tools of the Monetary Policy does not affect
the unorganized money market making Monetary Policy less affective.
 Predominance of cash transaction- In India still there is huge dominance of the cash in total
money supply. It is one of the main obstacles in the effective implementation of the Monetary
Policy. Because monetary policy operates on the bank credit rather on cash.
 Increase volatility– As the Monetary has adopted changes in accordance to the changes in the
external sector in India, It could lead to high amount of the volatility.