Apna Sapna Money-Money
RBI
Monetary Policy and
Industrial Policy
ByRahul Jain
Monetary Policy
The term "monetary policy" refers to the actions
undertaken by a central bank, such as the RBI,
to influence the availability and cost of money
and credit to help promote national economic
goals.
Tools of monetary policy
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Thus the three ways in which the federal
reserve can change the money supply are
1. Change in Bank Rate
2. Open Market operations like buying and
purchasing of government securities
3. Change in Cash reserve ratio and SLR
SLR REQUIREMENTS
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Banks, NBFCs, and HFIs are required to invest in
government securities and other approved debt
instruments and securities to comply with the
SLR requirements of the RBI.
The SLR, which is the minimum level of
investment in approved securities, computed daily,
is a percentage of the outstanding net demand and
time liabilities (NDTL) of banks.
For NBFCs and HFIs, SLR is a percentage of their
outstanding public deposits.
Increase in Money Supply
1. Reduction in bank rate, specific interest rate
on loans and savings
2. Buying of government securities from bank
to increase the money supply
3. Reduction in the variable reserve ratios like
statutory liquidity ratio and cash reserve ratio.
(Mishra & Puri)
Reduction in Money Supply
1. Rise in bank rate, specific interest rate on
loans and savings
2. Selling of government securities to bank to
curb inflation and to contract the money
supply
3. Increase in the variable reserve ratios like
statutory liquidity ratio and cash reserve ratio.
Inflation
In economics, inflation is an increase in the
general level of prices of a given kind. General
inflation is referred to as a rise in the general
level of prices.
Measuring Inflation
Use of price index system for measuring
inflation.
For example, The Consumer Price Index (CPI)
is a measure of the average change over time
in the prices paid by urban consumers for a
market basket of consumer goods and services
Causes of Inflation
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Cost Push
Demand Led
Costs of Inflation
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It leads to uncertainty about the value of
money
It can lead to recession
It can hurt the productivity
Fear of Inflation
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Can destabilize the economy
Can lead to reduction in Purchasing Power
RBI
Establishment
The Reserve Bank of India was established
on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act,
1934.
•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.
•Though originally privately owned, since
nationalization in 1949, the Reserve Bank is
fully owned by the Government of India.
•
Preamble
"...to regulate the issue of Bank Notes and
keeping of reserves with a view to securing
monetary stability in India and generally to
operate the currency and credit system of the
country to its advantage."
Central Board
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The Reserve Bank's affairs are governed by a
central board of directors. The board is
appointed by the Government of India in
keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years
Constitution:
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Official Directors
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Full-time : Governor and not more than four Deputy
Governors
Central Board
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Non-Official Directors
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Nominated by Government: ten Directors from various
fields and one government Official
Others: four Directors - one each from four local boards
Functions : General superintendence and
direction of the Bank's affairs
Local Boards
One each for the four regions of the country in
Mumbai, Calcutta, Chennai and New Delhi
Membership:
 consist of five members each
 appointed by the Central Government
 for a term of four years
 Functions : To advise the Central Board on local
matters and to represent territorial and economic
interests of local cooperative and indigenous banks;
to perform such other functions as delegated by
Central Board from time to time.
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Main objectives
1. Monetary authority
 Formulates, implements and monitors the
Monetary Policy, announced twice a year.
 Announces the Credit Policy, announced twice
a year - in April it announces new policy
initiatives, the October pronouncement is a
review of the April policy.
 Objective: Maintaining price stability and
ensuring adequate flow of credit to productive
sectors.
 Maintain optimum Liquidity in the economy.
Doing Business in India
Simplified
India’s Industrial Policy
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The Indian government has removed bureaucratic
controls on industry, under its liberalization policy.
However, licensing and restrictions still exist in the
following sectors:
Two sectors reserved for public sector viz., Atomic
Energy and Railways
Five Industries in which licensing is compulsory –
Distillation and brewing of alcoholic drinks
Cigars and cigarettes of tobacco
Electronic Aerospace and Defence equipment
Industrial explosives
Hazardous chemicals
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Manufacture of items reserved for Small Scale
Sector.
Proposals attracting locational restrictions
GREAT OPPORTUNITIES FOR US FDI!
Note – The exemption from licensing also
applies to all substantial expansion of existing
units.
Foreign Investment in India
Foreign Direct Investment (“FDI”)
Opportunities exist for investing in India in sectors as diverse
as tourism and infrastructure, petrochemicals and mining
technology and engineering, real estate, biotechnology, bioinformatics and nanotechnology. India is also being seen as the
global destination for R&D, engineering design and prototype
development and a manufacturing hub for high technology
products.
FDI Policy
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According to the current policy, FDI is not permitted in the
following sectors –
Certain sectors, namely:
Atomic energy;
Lottery business/gambling and betting;
Agriculture (excluding floriculture, horticulture, seed
development, animal husbandry, pisciculture and cultivation
of vegetables, mushrooms, etc.)
Plantations (excluding tea plantation)
Retail Trading (other than single brand retail)
Investment by Foreign Institutional Investors
(“FII”)
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An FII must be registered with SEBI and must comply
with certain investment limits. They may purchase
shares and/or convertible debentures of an Indian
company under the Portfolio Investment Scheme.
The shares/convertible debentures of an Indian
company must be purchased through registered
brokers on recognized stock exchanges in India.
FII’s are also permitted to purchase shares/convertible
debentures of an Indian company through private
placement/arrangement.
Foreign pension funds, mutual funds, investment
trusts, asset management companies, nominee
companies and incorporated/institutional portfolio
managers or their power of attorney holders may
invest In India as FIIs.
References
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www.bls.gov
Mishra & Puri , MACRO ECONOMICS.
Sultan Chand & Sons
www.americanchronicle.com/articles/viewArti
cle.asp
www.economics.about.com
www.investopedia.com
www.en.wikipedia.org