RBI and its monetary policy by Jitu MIBS pune

1. RBI & its Monetary Policy Macro Economics Presentation by KaushalendraKishore (19) JitendraKumar Jain (16) NahushGaikwad (28) Arvind Sharma (08) DivyaVyas (10)

3. Current Monitory Policy

4. Purchase Power Parity (PPP)2/20

5. Reserve Bank of India The central bank of the country--Reserve Bank of India (RBI). Established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid up which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalized in the year 1949 No of members on central board is 20 (incl. governor and 4 deputy governors) 3/20

6. Need for the Reserve Bank The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.The Bank was constituted for the need of following: To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage. 4/20

8. Functions of Reserve Bank of India Controller of CreditThe Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. Controller of money market The Reserve Bank of India is armed with many more powers to control the Indian money market Custodian of foreign exchange reserves Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. 6/20

9. A) TRADITIONAL FUNCTIONS 1. Monopoly of currency notes issue2. Banker to the Government(both the central and state)3. Agent and advisor to the Government4. Banker’s Bank5. Acts as the clearing house of the country6. Lender of the last resort (B R P)7. Custodian of the foreign exchange reserves8. Maintaining the external value of domestic currency9. Controller of forex and credit (Credit Policy) 10. Ensures the internal value of the currency 11. Publishes the Economic statistical data12. Fight against economic crisis and ensures stability of Economy.

10. B) PROMOTIONAL FUNCTIONS 1. Promotion of banking habit and expansion of banking systems. 2. Provides refinance for export promotion. (E P C G) 3. Expansion of the facilities for the provision of the agricultural credit through NABARD. 4. Extension of the facilities for the small scale industries. 5. Helping the Co-operative sectors. 6. Prescribe the minimum statutory requirement. (SLR) 7. Innovating the new banking business transactions.

11. C) SUPERVISORY FUNCTIONS 1. Granting license to Banks.2. Inspecting and making enquiry or determining position in respect of matters under various sections of RBI and Banking regulations.3. Periodical review of the work of the commercial banks.4. Giving directives to commercial banks.5. Control the non-banking finance corporations.6. Ensuring the health of financial system through on-site and off-site verification.

12. Non Monetary Functions Role as Supervisor RBI enjoys wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them.. 10/20

13. Non Monetary Functions Promotional functions The major function of Reserve Bank is to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI SFC Deposit Insurance Corporation in 1962 Unit Trust of India in 1964, Industrial Development Bank of India in 1964 11/20

14. Monetary Policy What is monetary policy? A macroeconomic policy tool used to influence interest rates, inflation, and credit availability through changes in the supply of money available in the economy. In India it is also called the Reserve Bank of India’s ‘Credit Policy’ as the stress is primarily on directing credit. 12/20

16. TOOLS OF MONETARY POLICY There are two kinds of tools: Quantitative tools –control the volume of credit and inflation, indirectly. Qualitative tools –they control the supply of money in selective sectors of the economy. 14/20

17. Quantitative Tools Bank Rate Bank Rate is the rate at which RBI allows finance to commercial banks. Bank Rate is a tool, which RBI uses for short-term purposes. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate. Role of bank rate is limited in India because The structure of interest rates is administered by RBI Commercial banks enjoy specific refinance facilities. CRR All scheduled commercial banks are required to maintain a fortnightly minimum average daily cash reserve equivalent with RBI .The apex bank is empowered to vary this ratio between 3 and 15 per cent. RBI uses CRReither to impound the excess liquidity or to release funds needed for the economy from time to time. 15/20

19. Open Market Operations An instrument of monetary policy It involves buying and selling of govt. securities by the RBI to influence the volume of cash reserves with commercial banks and thus influence their loans and advances To contract the flow of credit ,RBI starts selling govt securities To increase the credit flow RBI starts purchasing the govt securities. 17/20

20. Selective and Direct Credit Control Or Qualitative Measures The main objective is to check speculation and rising prices The RBI issues directives to banks relating to the purpose for which advances may or may not be made The margins to be maintained in respect of secured advances The maximum amount of advance to any borrower The maximum amt. of guarantee that can be given on behalf of any firm 18/20

21. Kinds of Selective Credit Controls Specifies minimum margins for lending against specific securities Ceiling on amt of credit for certain purposes to stem the flow of credit to speculative and non productive sectors Charges discriminatory rate of interest on certain types of advances 19/20

22. Monetary Policy 2005-06 Key Figures Reverse Repo Rate Hiked by 25 bps, stands at 5% Repo Rate Unchanged at 6% Bank Rate Unchanged at 6% CRR Unchanged at 5% Inflation FY06 5-5.5% GDP FY06 Target 7% 20/20

23. Current Monetary Policy Key Figures Reverse Repo 4% Repo Rate 4.25% Bank Rate 6% CRR Unchanged 5.5% Inflation 5.07% 21/20

24. Purchase Power Parity 22/20

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