It discuss on how various factors affects the interest rates and how effective is the tightening of interest rates for growing inflation. This Presentation includes: What is inflation/Inflation, Causes of Inflation, What is monetary policy, Relationship between monetary policy and inflation, What are the different monetary policy instruments- Bank rate, Cash Reserve Ratio(CRR), Statutory liquidity ratio(SLR), Repo rate and Reverse Repo Rate. It also includes steps taken by RBI to control inflation and changes in interest rates from 2010-2013.

1. Effectiveness of tightening interest rates
as a
monetary tool on growing inflation
in INDIA
Presented by
BHAVESH BHANSALI

2. What is Inflation??
A sustained increase in the general level
of prices so that a given amount of money
buys less and less.

3. Causes of Inflation
 Inflation due to rise in real aggregate
Demand.
 Inflation due to contraction in Aggregate
Supply.

4. What is Monetary Policy??
It is the process by which the central bank or
monetary authority of a country regulates
The supply of money
 Availability of money and
 Cost of money or rate of interest


5. Monetary policy & Inflation
When inflationary pressures build up:
raise the short-term interest rate (the policy rate)
which squeezes consumption and investment.

6. Monetary Policy Instruments
Bank rate
Cash Reserve Ratio
Statutory Liquidity Ratio
Repo rate
Reverse Repo rate

7. Bank rate
Rate at which Central Bank lends money to commercial Banks.
Any increase in Bank rate results in an increase
in interest rate charged by Commercial banks
which in turn leads to low level of investment
and low inflation

8. Cash Reserve Ratio
It refers to the cash which banks have to maintain
with RBI as certain percentage of their demand
and time liabilities.
An increase in CRR reduces the cash with
commercial banks which results in low supply
of currency in the market, higher interest rate
and low inflation

9. Statutory Liquidity Ratio



It is the percentage of total deposits commercial
banks have to invest in government bonds and
other approved securities.

Objectives of SLR
 To restrict expansion of Bank credit
 To augment bank’s investment in government securities
 To ensure solvency of banks

10. REPO RATE
Repo rate is the interest rate at which the central bank lends
funds to banks against pledging securities
It enables collateralized short term borrowing and lending
through sale/purchase operations in debt instruments

11. REVERSE REPO RATE
The rate at which RBI borrows money from the banks
(or banks lend money to the RBI)
is termed the reverse repo rate.
If the reverse repo rate is increased, it means the RBI will borrow
money from the bank and offer them a lucrative rate of interest.
As a result, banks would prefer to keep their money with the RBI
(which is absolutely risk free)
instead of lending it out (this option comes with a certain
amount of risk).

12. STEPS TAKEN BY RBI TO CONTROL INFLATION


13. STEPS TAKEN BY RBI TO CONTROL INFLATION
 RBI has raised the policy rate by 0.25 as it kept its focus on controlling
the inflation.
 RBI eased the liquidity through a reduction in the marginal standing
facility rate, at which banks borrow from RBI by 0.75 basis to 9.5%
 Increased the repo rate by 0.25 basis points to 7.5% from 7.25%.
 Keeping the CRR unchanged, RBI reduced the minimum daily
maintenance of CRR from 99% to 95% to induced liquidity in the system.

14. CHANGE IN INTEREST RATE IN INDIA