The document discusses various monetary policy instruments used by the Reserve Bank of India to regulate money supply and credit conditions. It explains key tools like cash reserve ratio (CRR), statutory liquidity ratio (SLR), refinance facilities, open market operations (OMO), liquidity adjustment facility (LAF), market stabilization scheme (MSS), repo rate, reverse repo rate, and bank rate. It provides details on how these tools work and their impact on the economy, interest rates, exchange rates, inflation, and common people.

2. Presented by:
 Mayank Satia
 Hemlata Raundhal
 Abin Mathew
 Ankita Shirsat

3. MONETARY POLICY
o Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
use of money and credit.
o Objectives of monetary policy in India are:
i) Maintaining price stability
ii)Ensuring adequate flow of credit to the productive sectors of
the economy to support economic growth
iii)Financial stability

4. INSTRUMENTS
• CRR
• SLR
Direct • Refinance Facilities
Instruments
• LAF
• OMO
Indirect • MSS
• Repo/Reverse Repo Rate
Instruments • Bank Rate

5. CASH RESERVE RATIO
(CRR)
• It is a banking regulation that sets the minimum reserves
each bank must hold by way of cash. It is expressed in
terms of percentage.
• CRR is also called as Liquidity Ratio as it seeks to control
the money supply in the economy.
In US it is called the Federal Reserve.
• These deposits are designed to satisfy cash withdrawal
demands of customers and to maintain liquidity in the
market.

6. MAINTENANCE OF CRR
• In terms of Sec 42 (1) of the RBI
Act, 1934, Scheduled Commercial Banks are required
to maintain with RBI an average cash balance, the
amount of which shall not be less than 3% of the total
of the NDTL in India, on fortnightly basis and RBI is
empowered to increase the rate to such higher rate not
exceeding 20% of the NDTL under the RBI Act, 1934.

7. STATUTORY LIQUIDITY
RATIO
• SLR is the amount which the banks has to maintain in
the form of cash, gold and approved securities.
• The rate is specified as some percentage of TDTL.
• The date at which is taken to calculate the demand and
time liabilities of the bank is the last Friday of the
preceding fortnight.

8. MAINTENANCE OF SLR
Scheduled Commercial Banks are required to maintain under Sec 42
of the RBI Act, 1934, are required to maintain in India:
• a) Cash
• b) In gold valued at a price not exceeding its current
market price.
• c) In unencumbered approved securities valued at a price
as specified by the RBI on time to time.

9. IMPACTS OF CRR AND
SLR
• Liquidity
• The rates help control liquidity and accelerate credit growth in an economy.
• CRR is 6%
Eg: If a bank has Rs 1,00,000 as deposits then the bank will be able to lend
only Rs 94000/- as Rs 6000/- will be kept as reserves with the bank.
• Now in the above example if the CRR rate goes down to 5%, the bank will be
able to lend Rs 95000/-

10. INTEREST RATES
1) IR depends upon the demand from the borrowers – supply from the
banks.
2) Hike in CRR and SLR would reduce the lending ability of the banks
and demand of the borrowers remaining the same the interest rates
would shoot up.
3) Decrease in CRR and SLR would have a double impact –
i) Increase in liquidity in the market
ii) Interest rates on short term deposits will also go down.

11. EXCHANGE RATES
• Cut in reserve requirements would raise the level of liquidity
which would decrease the inflow of foreign money for interest
rate arbitrage and thus would stem the rupee rise higher.
• Hike in CRR  decline in liquidity  higher interest rates 
rupee depreciates.
• Cut in CRR  Rise in liquidity  fall in interest rates  Rupee
depreciates.

12. COMMON MAN
• Hike in reserve requirements
a)Higher returns from the debt-oriented instruments
b)Loans would become costly as the banks would charge
higher rate of interest.
i) Fixed interest rate
ii) Floating interest rate

13. REFINANCE
FACILITIES
• Refinancing may refer to the replacement of an existing debt obligation with a
debt obligation under different terms.
• The terms and conditions of refinancing may vary widely by
country, province, or state, based on several economic factors such as, inherent
risk, projected risk, political stability of a nation, currency stability, banking
regulations, borrower's credit worthiness, and credit rating of a nation.
• There are various types of refinance offered by RBI.
• Reserve Bank of India permitted the banks to offer refinance on various loans.
However, refinance companies have the restriction to use floating provisions
instead of specific provisioning.
• Refinance by RBI is also offered to boost the growth of SMEs (Small and
Medium Enterprises), especially those which are currently facing credit
crunch.

14. • RBI also offers refinance facility to help out the exporters.
• In 2008, RBI offered credit lines of 5,000 crores to Export-Import Bank of
India (Exim Bank) to support the export sector.
• Export Credit Refinance Facility
RBI offers export credit refinance facility to the scheduled banks under
Section 17(3A) of RBI Act 1934.
• Credit refinance was offered up to 15% of the outstanding export credit.
Repo Rate is applicable on the export credit refinance.
• The monthly payable interest is calculated on daily balances, which gets
debited to the account.
• The maximum duration for repayment is 180 days.
• One can apply for an export credit refinance of Rupees one lakh and
multiple of thereof.

15. SPECIAL REFINANCE FACILITY
(SRF)
Special refinance facility was introduced under Section 17(3B) of RBI
Act, 1934. It allows scheduled commercial banks (except Regional Rural
Banks) to refinance up to 1% of Net Demand and Time Liabilities (NDTL)
of each bank. Repo rate under LAF (Liquidity Adjustment Facility) is
applicable for this facility. With effect from November 3, 2008, the rate lies
at 7.5%.
• MUMBAI, JUNE 18:
• The Reserve Bank of India has decided to enhance the export credit
refinance limit to 50 per cent of the outstanding rupee export credit for
banks from 15 per cent, a move that will inject Rs 30,000 crores into the
system.

16. LIQUIDITY ADJUSTMENT FACILITY
(LAF)
• It is a monetary policy tool which allows banks to borrow money
through repurchase agreements.
• Liquidity adjustment facilities are used to aid banks in resolving any
short-term cash shortages during periods of economic instability or from
any other form of stress caused by forces beyond their control.
• Various banks will use eligible securities as collateral through a repo
agreement and will use the funds to alleviate their short-term
requirements, thus remaining stable.

17. • An activity by Central bank to buy or sell government bonds on
the open market.
• Aim of OMO is to control the short term interest rate and the
supply of base money in an economy.
• Indirectly control the total money supply available in the
market.
• It helps regulate interest rates and foreign exchange rates.

18. Prior to 1991 financial reforms,
Major source of funding and control over credit and interest rates
CRR (Cash reserve ratio)
SLR (Statutory Liquidity Ratio).
After 1991 financial reforms,
Use of CRR as an effective tool was de-emphasized and the use of open market operations
increased.
OMO’s are more effective in adjusting market liquidity.

19. OUTCOME OF AN
OMO
• When the RBI buys bonds from the market and infuses liquidity, the
consequences are:
• It tends to soften the interest rates.
• Fresh bonds can be issued at lower yields and the government
can thus borrow at a reasonable cost.
• It enables corporates to borrow at favorable interest rates.
• It prevents the rupee from strengthening unnecessarily and
thereby protects the interest of exporters.
• It may tend to increase inflation.

20. MARKET STABILIZATION SCHEME (
• Also know as Intervention bonds.
• Used by Central Banks to mop up liquidity caused by Foreign
Exchange Market intervention.
• LAF and the OMO’s were dealing with day to day liquidity
management.
• MSS was set up to sterilize the liquidity absorption and make it
more enduring.
• Funds transferred to separate account (MSSA) instead of
Governments account.

21. REPO RATE
• REPO is an instrument of Money Market
• Reserve bank charges some interest rate on the cash borrowed by
banks. This rate is usually less than the interest rate on bonds as the
borrowing is collateral. This interest rate is called ‘repo rate’.
• Reserve bank and commercial banks involve in repo transactions but
not restricted to these two.
• Borrower of funds is called as seller of repo and lender of funds is
called as buyer of repo.
• Current REPO rate is 8%

22. IMPACT OF REPO RATE ON ECONOM
• A low repo rate signifies that banks are able to borrow funds cheap
and subsequently, will lend to customers too at a relatively lower rate.
• The repo rate is also considered the benchmark rate for the economy.
Lower rates are seen as an aid to economic growth as finance is
accessible at less cost and that helps people borrow money cheap to
invest in ventures.
• A cut in this rate is considered a signal to boost economic
growth, which overall is a good move and gets reflected through
positive reaction in equity markets.

23. REVERSE REPO
• Reverse Repo rate is the rate at which the RBI borrows money from
commercial banks.
• In a reverse repo Reserve Bank borrows money from banks by lending
securities. The interest paid by Reserve Bank in this case is called
reverse repo rate.
• An increase in Reverse repo rate can cause the banks to transfer more
funds to RBI due to this attractive interest rates.
• This tool can be used by RBI to drain excess money out of the
banking System.
• Current Reverse REPO Rate : 7%

24. BANK RATE
• Bank rate, also referred to as the discount rate, is the rate of interest
which a central bank charges on the loans and advances to a
commercial bank.
• This is typically done on a quarterly basis to control inflation and
stabilize the country’s exchange rates
• It is the rate which central bank provides to the commercial bank for
the excess reserves being kept with the central bank
• The bank rate acts as the penal rate charged on banks for shortfalls in
meeting their reserve requirements
• Current Bank Rate : 9%

25. DIFFERENCE BETWEEN BANK RATE &
REPO RATE
• Whenever the banks have any shortage of funds they can
borrow it from the central bank. - Bank Rate
• Repo (Repurchase) rate is the rate at which the central bank
lends short-term money to the banks against securities.