Information about Monetary Policy

1. MONETARY POLICY
Presented by:
Agrawal Bhavin
(02)
Madhavi Nitin
(28)

2. Mr. CD Desmukh
The First Indian Governor
of Reserve Bank Of India
Mr. Raghuram Rajan
The Present Indian
Governor of Reserve
Bank Of India

3. What is Monetary Policy?
Monetary policy is the process by which monetary authority of a country,
generally a central bank controls the supply of money in the economy by
its control over interest rates in order to maintain price stability and
achieve high economic growth.
In India, the central monetary authority is the Reserve Bank of
India(RBI). is so designed as to maintain the price stability in the
economy.

4. Other objectives of the monetary policy of India, as stated by RBI, are:
Price Stability:
Price Stability implies promoting economic development with
considerable emphasis on price stability.
Controlled Expansion Of Bank Credit:
One of the important functions of RBI is the controlled expansion of
bank credit and money supply with special attention to seasonal
requirement for credit without affecting the output.
Promotion of Fixed Investment :
The aim here is to increase the productivity of investment by
restraining non essential fixed investment.

5. Restriction of Inventories and stocks:
The main objective of this policy is to avoid over-stocking and idle
money in the organization.
Promotion of Exports and Food Procurement Operations:
Monetary policy pays special attention in order to boost exports
and facilitate the trade. It is an independent objective of monetary
policy.
Desired Distribution of Credit:
This policy decides over the specified percentage of credit that is
to be allocated to priority sector and small borrowers.
Equitable Distribution of Credit:
The policy of Reserve Bank aims equitable distribution to all
sectors of the economy and all social and economic class of
people.

6. To Promote Efficiency:
It tries to increase the efficiency in the financial system and
tries to incorporate structural changes such as deregulating
interest rates,to introduce new money market instruments etc.
Reducing the Rigidity:
RBI tries to bring about the flexibilities in the operations
which provide a considerable autonomy. It encourages more
competitive environment and diversification.

7. Monetary operations
Monetary operations involve monetary techniques which operate
on monetary magnitudes such as money supply, interest rates and
availability of credit aimed to maintain Price Stability, Stable
exchange rate, Healthy Balance of Payment, Financial stability,
Economic growth. RBI, the apex institute of India which monitors
and regulates the monetary policy of the country stabilizes the
price by controlling Inflation.
RBI takes into account the following monetary policies:

8. Major Operations
1. Open Market Operations (OMO):
An open market operation is an instrument of monetary policy which
involves buying or selling of government securities from or to the public and
banks. The RBI sells government securities to contract the flow of credit and
buys government securities to increase credit flow. Open market operation
makes bank rate policy effective and maintains stability in government
securities market.
2. Credit Authorization Scheme (CAS):
Under this instrument of credit regulation RBI as per the guideline authorizes
the banks to advance loans to desired sectors.

9. 3. Cash Reserve Ratio (CRR):
Cash Reserve Ratio is a certain percentage of bank deposits which
banks are required to keep with RBI in the form of reserves or
balances .Higher the CRR with the RBI lower will be the liquidity in
the system and vice-versa.RBI is empowered to vary CRR between 15
percent and 3 percent. But as per the suggestion by the Narsimham
committee Report the CRR was reduced from 15% in the 1990 to 5
percent in 2002.
Current CRR: 4.00% (w.e.f 09/02/2013)

10. 4. Statutory Liquidity Ratio
Every financial institution has to maintain a certain quantity of
liquid assets with themselves at any point of time of their total time
and demand liabilities. These assets can be cash, precious metals,
approved securities like bonds etc. There was a reduction of SLR
from 38.5% to 25% because of the suggestion by Narshimam
Committee.
Current SLR: 22.00% (w.e.f. 09/08/2014)

11. 5. Bank Rate Policy:
The bank rate, also known as the discount rate, is the rate of interest
charged by the RBI for providing funds or loans to the banking
system. This banking system involves commercial and co-operative
banks, IDBI, IFC, EXIM Bank, and other approved financial
institutes. Funds are provided either through lending directly or
rediscounting or buying money market instruments. Increase in Bank
Rate increases the cost of borrowing by commercial banks which
results into the reduction in credit volume to the banks and hence
declines the supply of money. Increase in the bank rate is the symbol
of tightening of RBI monetary policy.
Current Bank Rate: 8.75% (w.e.f. 15/01/2015)

12. 6. Moral Suasion:
Moral Suasion is just as a request by the RBI to the commercial banks
to take so and so action and measures in so and so trend of the
economy. RBI may request commercial banks not to give loans for
unproductive purpose which does not add to economic growth but
increases inflation.
7. Credit Ceiling:
In this operation RBI issues prior information or direction that loans to
the commercial banks will be given up to a certain limit. In this case
commercial bank will be tight in advancing loans to the public. They
will allocate loans to limited sectors. Few example of ceiling are
agriculture sector advances, priority sector lending.

13. 8. Repo Rate and Reverse Repo Rate:
Repo rate is the rate at which RBI lends to commercial banks generally
against government securities. Reduction in Repo rate helps the commercial
banks to get money at a cheaper rate and increase in Repo rate discourages
the commercial banks to get money as the rate increases and becomes
expensive.
Current Repo Rate: 7.75% (w.e.f.15/01/2015)
Reverse Repo rate is the rate at which RBI borrows money from the
commercial banks. The increase in the Repo rate will increase the cost of
borrowing and lending of the banks which will discourage the public to
borrow money and will encourage them to deposit. As the rates are high the
availability of credit and demand decreases resulting to decrease in inflation.
Reverse Repo Rate: 6.75% (w.e.f.15/01/2015)

14. Current Situation
Since July 2014, inflationary pressures (measured by changes in the
consumer price index) have been easing.
Crude prices, barring geo-political shocks, are expected to remain low
over the year. Weak demand conditions have also moderated inflation
excluding food and fuel, especially in the reading for December. Finally,
the government has reiterated its commitment to adhering to its fiscal
deficit target.
Inflation outcomes have fallen significantly below the 8 per cent
targeted by January 2015. On current policy settings, inflation is likely to
be below 6 per cent by January 2016.
The RBI had committed to initiate the process of monetary easing as
soon as data indicated that medium term inflationary targets would be met.

15. Keeping this commitment in mind, it has been decided to:
> reduce the policy repo rate under the liquidity adjustment facility
(LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with
immediate effect;
> keep the cash reserve ratio (CRR) of scheduled banks unchanged at
4.0 per cent of net demand and time liabilities (NDTL);
> continue with daily variable rate repos and reverse repos to smooth
liquidity.
Consequently, the reverse repo rate under the LAF stands adjusted
to 6.75 per cent, and the marginal standing facility (MSF) rate and the
Bank Rate to 8.75 per cent with immediate effect.

16.  In a surprise move, the Reserve Bank of India (RBI) on Thursday cut
the reverse repo rate by 25 basis points to 7.75%. The move comes at a
time when inflation is steadily coming down and cries for a rate cut were
growing loud.
http://www.tradingeconomics.com/india/interest-rate/forecast

17. Effect on Economy
 Bankers and market players have already started factoring in a deep
cut in the repo rate this year, with estimates ranging from 50 bps to as
much as 125 bps.
RBI’s surprise move led to euphoria in the markets. Benchmark
indices posted record gains, with the BSE Sensex soaring 729 points,
or 2.66 per cent.
The rupee appreciated to 61.48/dollar in intra-day trade but due to
dollar-buying by state-run banks, possibly on behalf of the central
bank, the currency ended at 62.07, compared with its previous close of
62.19.
Analysts said Budget 2015-16, to be presented next month, could
decide the course of monetary policy through its stance on fiscal
consolidation.
BS Reporter | Mumbai January 16, 2015