E-MBA-MS 2019-2021 Indian Monetary Policy Created By: Amogh | Raghu | Ranjith | Seema Date: 24th Nov 2019 TABLE OF CONTENTS 01 History & Preamble 07 Reserve Bank Of India 02 Definition & Goals 08 A Case Study Components 09 Impact of Repo Rate/CRR/SLR rate Balance Cycle Process At High Level 10 05 Pros & Cons Types 11 06 Monetary Policy Instruments 03 04 HISTORY & PREAMBLE 05 01 In 1921, three presidency banks (Madras, Bombay & Bengal) were amalgamated to form the imperial Bank of India It was primarily a commercial bank but it discharged certain central banking functions specifically as the banker to the government. Initially it was privately owned but it was the 1st Bank to be Nationalized in 1949 and is now fully owned by the Government of India. 04 02 It was set up on the recommendation of the HILTON YOUNG COMMISSION. It was started as Shareholders Bank with a paid up capital of 5 crores. The Central office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central office is where the Governor sits and where policies are formulated. 03 It was established on 1st April 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. DEFINITION The policy that regulates the demand & supply of the money in the economy is the monetary policy. The monetary policy is announced by the Central bank in the country i.e. RBI. RBI uses many instruments to put in place the required kind of monetary policy - CRR, SLR, Bank rate, Repo & Reverse Repo rates, MSF rate, Open Market Operations etc. Recently there were many changes in the way Monetary Policy of India is formed – with the introduction of Monetary Policy Framework (MPF), Monetary Policy Committee (MPC), and Monetary Policy Process (MPP). Earlier monetary policy is announced twice in slack season (April- sept) & busy season ( oct - mar ).Presently RBI releases bimonthly monetary policy statement i.e, every 2 months from April,2014. Cash Reserve Ratio Marginal Standing Facility Statutory Liquidity Ratio Open Market Operation Bank Rate GOALS Primarily Price Stability, while keeping in mind the objective of promoting growth. Monetary Policy is crafted to attain below objectives: 1.Rapid Economic growth. 2.Price stability. 3.Exchange rate stability. 4.Full Employment. 5.Balancing savings & investments Reverse Repo Rate Repo Rate COMPONENTS Framework (FITF): An abstract framework, prime objective to maintain price stability. Target is set, once in every 5 years The committee which is responsible deciding the policy interest rate required to achieve the Inflation Target Framework set by RBI in accordance with (FITF) . which aims to achieve the set FITF target of Inflation. The process of achieving the set FITF target of Inflation rate Various tools by RBI PROCESS – AT A HIGH LEVEL MONETARY POLICY INSTRUMENTS Cash Reserve Ratio CRR is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. The higher the CRR with the RBI, the lower will be the liquidity in the system, and vice versa. RBI is empowered to vary CRR between 3 and 15 percent. 4% Statutory Liquidity Ratio The bank has to maintain at the close of business each day a minimum portion of NDTL (Net Demand & Time Liabilities) in cash, gold & approved government securities. SLR currently stands at 19.05%. An increase in SLR affects banks liability to lend. 18.50% Repo Rate Reserve Repo Rate Bank Rate Open Market Operation(OMO) Marginal Standing Facaility(MSF) Repo rate is the rate at which RBI lends to commercial banks for short period against government securities like treasury notes & treasury bills. 5.15% Reverse Repo rate is the rate at which RBI borrows from commercial banks in short-term. If bank have excess funds, they deposited with RBI to earn interest. IF RBI wants to reduce liquidity it hikes the reverse repo rate sucking liquidity from the banking system. 4.90 % The rate at which RBI lends money to domestic banking system. It is the purchase /sales of government securities & treasury bills by RBI from the market. OPO is done to control liquidity in the economy. RBI sells government bonds to banks. OMO is one tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels. MSF is the rate at which bank borrows overnight funds from RBI against government securities. MSF is used by commercial banks in an emergency. Banks can borrow 1% of NDTL. Current MSF rate is 5.40% 5.40 % 19% 5.40 % TYPES Expansionary monetary policy Contractionary monetary policy Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. Government buys securities (OMO). Contractionary policy refers to either a reduction in government spending, particularly deficit spending, or a reduction in the rate of monetary expansion by a central bank. CRR, Repo Rate, Bank Rates: CRR, Repo Rate, Bank rate: Money Supply Money Supply: Interest Rates Interest rates: Aggregate demand Aggregated demand: Currency value Currency value: Investment expenditure: Investment expenditure: RESERVE BANK OF INDIA Manages monetary affairs, determines short-term interest rates Determines monetary policy by manipulating the monetary policy instruments Main goal is to low & stable inflation Seeks to promote steady growth in national output, low unemployment & orderly financial markets Seeks stability of prices Defends exchange rate of the country’s currency A CASE STUDY Let’s start with an example where an individual deposit Rs 1000 in bank. Then Bank receives Rs 1000 and has to keep some percentage of it with RBI as SLR and a percentage of it with RBI as CRR. If the prevailing CRR is 6% then they will have to invest Rs 60 in Government Securities. If the prevailing SLR is 20% then they will have to invest Rs 200 in Government Securities. Then the total money deposited by any Bank with RBI is 260, the remaining Rs 740 would be available with the Bank for lending. IMPACT OF REPO RATE/CRR/SLR RATES THE BALANCE CYCLE CONS PROS Faster Implementation Flexibility reserves in controlling the Loan making link having indirect control & no direct control Tightening Money control to control inflation may further worsen the situation REFERENCES http://www.economicsdiscussion.net/monetary-policy/monetary-policy-meaning-objectives-scope-role-and-targetseconomics/31314 http://www.economicsdiscussion.net/banks/central-bank/central-bank-role-objectives-operations-and-autonomy-monetarypolicy/15963 https://www.clearias.com/monetary-policy/ http://www.economicsdiscussion.net/monetary-policy/objectives-of-monetary-policy-6-objectives-india/26107 http://www.economicsdiscussion.net/monetary-policy/3-objectives-of-monetary-policy-of-reserve-bank-of-india-rbi/10509 http://www.economicsdiscussion.net/monetary-policy/advantages/monetary-policy-objectives-advantages-anddisadvantages/12768 http://www.economicsdiscussion.net/reserve-bank/monetary-policy-of-the-reserve-bank-of-india-recent-changes/12929 http://www.economicsdiscussion.net/banks/credit-creation/top-7-weapons-used-by-reserve-bank-of-india-to-control-thecredit/13551 http://www.yourarticlelibrary.com/banking/important-methods-adapted-by-rbi-to-control-credit-creation/23490 https://www.bankbazaar.com/finance-tools/emi-calculator/monetary-policy.html https://en.wikipedia.org/wiki/Monetary_policy https://www.investopedia.com/terms/m/monetarypolicy.asp https://en.m.wikipedia.org/wiki/Monetary_Policy_Committee_of_India https://www.indiatoday.in/sponsored-feature/story/repo-rate-reverse-repo-rate-linkage-home-loan-rates-326810-2016-07-01 http://www.economicsdiscussion.net/money/demand-for-money/essay-demand-for-money-and-its-factors-economics/25876 http://www.economicsdiscussion.net/rate-of-interest/total-demand-and-supply-for-money-with-diagram/7935 https://economictimes.indiatimes.com/news/economy/policy/how-does-the-monetary-policywork/articleshow/25119109.cms?from=mdr https://economictimes.indiatimes.com/wealth/borrow/what-is-monetary-policy/articleshow/67296236.cms?from=mdr https://financial-dictionary.thefreedictionary.com/intermediate+targets https://www.financialexpress.com/archive/the-whys-and-hows-of-credit-policy/132458/ https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=19331 THANK YOU
