Monetary Policy of RBI - 15 Mints Seminar Notes

Monetary Policy of RBI - 15 Mints Seminar Notes

Objective:

• Full employment
• Price stability
• Economic Growth
• Balance of Payment

Definition:

• Monetary Policy refers to the credit control measures adopted by the central bank of a country.

• Monetary policy “as policy employing central bank’s control of the supply of the supply of money as an instrument for achieves of general economic policy.”

• It can be classified into two measures one is qualitative measures and other is quantitative measures

Quantitative Measures :

Repo rate, bank rate, cash reserve ratio, open market operations and statutory liquidity ratio .. etc are the quantitative tools

REPO: RBI gives money to Bank by Government securities (for short time)

REPO rate -6.50%  on august 2023 which was decided by  MPC meeting held at June

REVERSE REPO: the interest rate at which  the RBI absorbs liquidity  from bans against the collateral of eligible government securities under the LAF(Liquidity adjustment fund)

LAF (Liquidity adjustment facility): injects /absorbs liquidity into the other bank from the banking system.

SDF(standing Deposit facility): The rate at which the RBI accepts uncollateralised deposit, on an overnight basis, from all LAF participants.

MSF(Marginal standing facility): the penal rate at which banks can borrow, on an overnight basis, from the reserve Bank by dipping into their statutory liquidity Ratio(SLR) portfolio.SDF and MSF rate is placed at 25 basis points above the policy repo rate

Bank rate: the rate at  which it is ready to by or rediscount bills of exchange  or other commercial papers. Alignment with MSF rate(over long term period like a year)

Cash reserve Ratio(CRR): the average daily balance that a bank is required to maintain with the Reserve Bank as a per cent of its (net demand and time liabilities(NDTL)

Statutory liquidity ratio(SLR): Every bank shall maintain assets, the value of which shall not be less than such percentage of the total of its demand and time liabilities in India. These assets can be cash in hand, gold, government securities etc.

Open Market Operation(OMOS):The include outright purchase/sale of  government securities by the Reserve bank for injection/absorption of durable liquidity in the banking system.

Qualitative measures :

Loan to value  ratio controls:  the collateral required for a loan amount $60,000 should be 1 lakh . however for $20,000  loan 1 lakh collateral should not be taken .

Consumer credit control:  RBI suggest 80%  down payment manditory for EMI CASE 1: If bike 10% down-payment and  the rest as loan than such terms should be eliminated.

Rationing : Asking to banks to manditory lend some sector more than the other EG: 18% to 30% credit through priority sector lending for agriculture farmers

Moral suassion : some cases even after RBI reduce the Repo rate the bank do not reduce the lending rates for loans.

Action: Governor speaks in interview or collages take firm actions for achieving inflation reduction.

Direct action: If even after such intimation banks do not heed the RBI, it will give penalty on that bank

Presented By,

Thiruvenkadam

Banking Student

Magme Medal, Hosur.