RBI and its monetary Policy to control and promote money markets

1. Dr Raju Indukoori
RBI’S MONETARY POLICY

2. RESERVE BANK INDIA (RBI)
• It is the central bank of India established in 1934.
• It frames monetary policy and closely works with the governments.
• More known for repo rate announcements which influences the economy.
• RBI stands among top 10 most influential central banks of the world based
on GDP, GDP growth rate and Bench mark interest rates

3. ORIGIN OF RBI
• Ideation and formation of RBI happened in british rule as they felt the need to boost their own
trade and business across the country in 18th century.
• 1773: Warren Hastings, Acting governor of Bengal (Combined West Bengal, Bihar, Orissa,
Assam and North Eastern parts and Bangladesh) recommended to form ‘General Bank of
Bengal and Bihar’.
• 1913: Britishers’ administered Chamberlin Commission (CC) raised the issue of a Central Bank
• 1913: J M Keynes, popular Economist who is a member of CC forumulated comprehensive plan
for Indian Central Bank. His proposal was not implemented due to the First World War.
• 1933: Bill was introduced in Indian Legislative assembly to form a central bank.
• 1934: Governor General’s assent made it as RBI Act 1934 on 6th Mar 1934.
• 1935: Commenced operations on 1st Apr 1935 as a shareholders’ bank with O A Smith as
Governor.
• 1943: Chintaman Deshmukh was the first Indian Governor succeeding J B Taylor
• 1949: After the Britishers left India, RBI was nationalized with Benegal Rama Rau as the
Governor.

4. RBI AFTER INDEPENDECE
• RBI Organization comprises of a governor, four deputy governors and 21 members in the
board appointed by GOI.
• It has 4 Zonal offices in
• Mumbai (Western Region)
• Delhi (Northern Region)
• Kolkata (Eastern Region)
• Chennai (Southern Region)
• It also has 31 regional offices.

5. RBI OBJECITVES
To regulate the issue of Bank notes and the 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 – Preamble, RBI Act 1934.
1. To remain free from political influence and be in successful operation for maintaining
financial stability and credit.
2. To discharge purely central banking functions in the Indian money market, such as acting
as the note-issuing authority, bankers’ bank and banker to Government, and to promote
the growth of the economy.
3. To assist the planned process of development of the Indian economy.

6. RBI ORGANIZATION
• Central Board comprising of 21 Directors
• Governor (1).
• 4 Deputy Governors
• Local Board Directors (4)
• Executive Directors (10)
• Government Officials (2)

7. ORGANIZATION STRUCTURE OF RBI
Central Board of Directors (21)
Official Directors : Governor (1) + Deputy Governors (4)
Non Official Directors: : Government Nominated (10) + Government Officials(2) + Local Board directors (4)
Governor (1)
Appointed by Central Government
Deputy Governor (4)
Appointed by Central Government
Directors ( 4)
Nominated by Central Government
Executive Directors ( 10)
Nominated by Central Government
Government Official (2)
Nominated by Central Government

8. 1. Consumer Education and Protection Department.
2. Corporate Strategy and Budget Department.
3. Department of Banking Regulation.
4. Department of Banking Supervision.
5. Department of Communication.
6. Department of Cooperative Bank Regulation.
7. Department of Cooperative Bank Supervision.
8. Department of Corporate Services.
9. Department of Currency Management.
10. Department of Economic and Policy Research.
11. Department of External Investments and Operations.
12. Department of Government and Bank Accounts.
13. Department of Information Technology.
14. Department of Non-Banking Regulation.
15. Department of Non-Banking Supervision.
16. Department of Payment and Settlement Systems.
17. Department of Statistics and Information Management.
18. Enforcement Department.
19. Financial Inclusion and Development Department.
20. Financial Markets Operation Department.
21. Financial Markets Regulation Department.
22. Financial Stability Unit.
23. Foreign Exchange Department.
24. Human Resource Management Department.
25. Inspection Department.
26. Internal Debt Management Department.
27. International Department.
28. Legal Department.
29. Monetary Policy Department.
30. Premises Department.
31. Raj Bhasha Department.
32. Risk Monitoring Department.
33. Secretary's Department.
34. Central Vigilance Cell.
DEPARTMENTS OF RBI

9. ROLE AND FUNCTIONS OF RBI
• Indian Central Bank.
• Issue Indian Currency.
• Banker to Government of India (GOI).
• Bankers Bank.
• Custodian Forex and Gold Reserves.
• Develops economic strategies for GOI.
• Frames monetary policy.
• Implements government policy and fiscal policy through monetary policy
• Monitors Indian Financial System.
• Controller of credit and Money market.
• Lender of the last resort.

10. ROLE OF RBI IN MONEY MARKETS
1. Ensure credit flow to the productive prioritized sectors.
2. Stabilize interest rates at desired levels consistent with the monetary policy
objectives.
3. Maintain liquidity through various platforms, instruments and markets.
4. Stabilizing forex rate at the desired level with indirect participation in the
forex markets.
5.

11. MONETARY POLICY OBJECTIVES OF A CENTRAL BANK
• Price Stability
• High economic growth
• Controlled expansion of bank credit
• Promotion of fixed investments
• Restricting inventories and stocks
• Promote efficiency of the financial system
• Reduce rigidity in financial system

12. FACTORS INFLUENCING MONETARY POLICY
1. Economic conditions
2. International factors
3. Fiscal policy
4. Domestic and foreign investments
5. Indian Industry conditions

13. RBI’S MONETARY POLICY OBJECTIVES
1. to maintain price stability Price stability is a necessary
precondition to sustainable growth.
2. to keep price stability in line with growth objective.

14. SYSTEM TO MEET THE OBJECTIVES
• Statutory basis was provided for the implementation of the flexible inflation targeting framework.
• GOI sets inflationary targets in consultation with RBI.
• Central Government notified that 4% Consumer Price Index (CPI) inflation as the target for the
period from August 5, 2016 to March 31, 2021.
• Upper tolerance limit of 6%.
• Lower tolerance limit of 2%.
• Failure to achieve the inflation target
• When average inflation is more than the upper tolerance level of the inflation target for any
three consecutive quarters.
• when average inflation is less than the lower tolerance level for any three consecutive
quarters.

15. MONETARY POLICY FRAMEWORK
• RBI Act was amended in 2016 to provide a statutory and institutionalized framework for
‘Monetary Policy Committee providing the legislative mandate to RBI on Monetary policy
framework.
• The framework aims at
• Setting the policy (repo) rate based on an assessment of the current and evolving
macroeconomic situation.
• Modulation of liquidity conditions to anchor money market rates at or around the repo rate.
• Announcement of Repo rate: Weighted average call rate (WACR) is around the repo rate.
• The operating framework is fine-tuned and revised ensuring consistency with the monetary
policy stance depending on the evolving
• financial market conditions
• monetary conditions,
• The liquidity management framework was last revised significantly in April 2016.

16. RBI’S MONETARY POLICY COMMITTEE
1. Monetary Policy Committee (MPC): Frame policy and meet at least 4 times in a year.
2. Monetary Policy Department (MPD) : Assist MPC.
3. Financial Markets Committee (FMC) : Meet daily.

17. PURPOSE OF MPC
• To maintain price stability.
• Entrusted to fix repo rate.

18. MONETARY POLICY PROCESS
• The Monetary Policy Committee (MPC) : Constituted by the Central Government to
frame monetary policy.
• Objective: To determine the policy interest rate required to achieve the inflation target.
• Members: MPC consists of 6 members.
• Monetary Policy Department (MPD) : Assists the MPC.
• Rate cut or hike: Views of key stakeholders in the economy, and analytical work of the
Reserve Bank contribute to the process for arriving at the decision on the policy repo rate.
• The Financial Market Committee (FMC): Meets daily to review the liquidity conditions so
as to ensure that the operating target of monetary policy (weighted average lending rate)
is kept close to the policy repo rate.

19. MPC MEMBERS
Comprises of RBI Governor as the Chair Person and 5 members nominated (3 by RBI and 2 by
Government of India).
RBI Officials.
1. Governor of the Reserve Bank of India – Chairperson, ex officio - Shaktikanta Das
2. Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio - BP Kanungo
3. One officer of the Reserve Bank of India to be nominated by the Central Board – Member,; -
Michael Patra
Academicians : Hold the office for 4 years
1. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
2. Professor Pami Dua, Director, Delhi School of Economics – Member;
3. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad - Member

20. MONETARY POLICY TOOLS
Quantitative
1. Repo Rate.
2. Reverse Repo Rate.
3. Marginal Standing Facility Rate (MSFR).
4. Corridor.
5. Bank Rate.
6. Marginal Cost of Funding based Lending
Rate (MCLR).
7. Cash Reserve Ratio (CRR).
8. Statutory Liquidity Ratio (SLR).
Qualitative
1. Open Market Operations (OMO).
A. Liquidity Adjustment Facility (LAF).
B. Market Stabilization Scheme (MSS).
2. Credit Ceiling.
3. Credit Authorization Scheme.
4. Moral Suation.

21. MONETARY POLICY INSTRUMENTS
1. Repo Rate
2. Reverse Repo Rate:
3. Marginal Standing Facility (MSF):
4. Corridor
5. Bank Rate
6. Marginal Cost of Funding based Lending Rate (MCLR)
7. Cash Reserve Ratio (CRR)
8. Statutory Liquidity Ratio (SLR):
9. Open Market Operations (OMOs):
A. Liquidity Adjustment Facility (LAF)
B. Market Stabilisation Scheme (MSS)
10. Others
A. Credit Ceiling
B. Credit Authorization Scheme
C. Moral Suation

22. 1.REPO RATE
The (fixed) interest rate at which the Reserve Bank provides overnight liquidity
to banks against the collateral of government and other approved securities
under the liquidity adjustment facility (LAF).

23. 2.REVERSE REPO RATE
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs
liquidity, on an overnight basis, from banks against the collateral of eligible
government securities under the LAF.

24. 3.MARGINAL STANDING FACILITY (MSF)
A facility under which scheduled commercial banks can borrow additional amount of
overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio
(SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve
against unanticipated liquidity shocks to the banking system.

25. 4.CORRIDOR
The MSF rate and reverse repo rate determine the corridor for the daily movement in
the weighted average call money rate.

26. 5.BANK RATE
• It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or
other commercial papers.
• Rate is published under Section 49 of the RBI India Act, 1934.
• This rate has been aligned to the MSF rate and, therefore, changes automatically as and
when the MSF rate changes alongside policy repo rate changes.

27. 6.MARGINAL COST OF FUNDING BASED LENDING RATE (MCLR)
• The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016
• Minimum interest rate that a bank can lend
• Tenor-linked internal benchmark,
• Determined internally by the bank depending on the period left for the repayment of a loan
• Linked to the deposit rates
• Calculated based on four components:
• Marginal cost of funds
• Negative carry on account of cash reserve ratio
• Operating costs
• Tenor premium.

28. 7.CASH RESERVE RATIO (CRR)
• CRR is the average daily cash balance that a bank is required to maintain with RBI.
• It is the net of demand and time liabilities (NDTL) that RBI may notify from time to time.

29. 8.STATUTORY LIQUIDITY RATIO (SLR)
• The share of NDTL that a bank is required to maintain in safe and liquid assets, like
unencumbered government securities, cash and gold.
• Changes in SLR often influence the availability of resources in the banking system for
lending to the private sector.
• SLR Securities
• T Bills
• Dated GOI Securities under market borrowing program and
• Market Borrowing Program (MBP)
• Market Stabilization Scheme (MSS)
• State Governments’ State development loans.
• Other instruments as stated by RBI as and when required.

30. 9. OPEN MARKET OPERATIONS (OMOS)
It is the role of RBI to bring financial market equilibrium and price stability or inflation. OMOs
is one tool to perform this activity in
1) Forex Market
2) Money Market
3) Debt market

31. 9. OPEN MARKET OPERATIONS (OMOS)
It is the role of RBI to bring financial market equilibrium and price stability or inflation. OMOs
is one tool to perform this activity in
1) Forex Market
2) Money Market
3) Debt market

32. TYPES OF OMO
RBI does OMOs to stabilize liquidity in money market through
A) Liquidity Adjustment facility (LAF): for overnight or very short run liquidity.
B) Market Stabilisation Scheme (MSM) : For durable liquidity.
• Outright purchase government securities for injection of durable liquidity.
• Sale of government securities for absorption of durable liquidity.

33. A. LIQUIDITY ADJUSTMENT FACILITY (LAF)
• The LAF consists of overnight as well as term repo auctions.
• Progressively, the RBI increased the proportion of liquidity injected under fine-tuning
variable rate repo auctions of range of tenors.
• The aim of term repo is to help develop the inter-bank term money market, which in turn
can set market based benchmarks for pricing of loans and deposits.
• It is to improve transmission of monetary policy.
• RBI conducts variable interest rate reverse repo auctions, as necessitated under the
market conditions.

34. B. MARKET STABILISATION SCHEME (MSS)
• Introduced in April 2004. It is also known as sterilization.
• Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed
through sale of short-dated government securities (G Secs) and treasury bills.
• Financial Institutions are the major participations in MSS.
• The money collected through MSBs has a limit up to Rs 6 Lakh crore and it will be with
RBI in government’s account. The money will not be given to Government as it may lead
again to excess of liquidity if government spends.

35. MSS – EXAMPLE
• Example1
• Excess FPI or FDI creates demand for rupee making value of rupee to rise which
effects exporters.
• To meet this crisis RBI buys dollar in excess to stabilize the exchange rate.
• This creates excess liquidity and money supply leading to inflation.
• To over come this crisis, RBI sells G secs known as Market Stabilizing Bonds (MSB)
to stabilize the money supply.
• Example2: Same happens in the opposite direction if money supply decreases.

37. QUESTIONS???

38. THANK YOU