CHAPTER 2

RBI AND ITS SUBSIDIARIES

PART-1

CHAPTER 2

RBI AND ITS SUBSIDIARIES

PART-1

CHAPTER 2

RBI AND ITS SUBSIDIARIES

PART-1

CHAPTER 3

MONETARY POLICY-1

INTRODUCTION

• Monetary policy is the macroeconomic policy laid down by the central

bank. It involves management of money supply and interest rate and is the

demand side economic policy used by the government of a country to

achieve macroeconomic objectives like inflation, consumption, growth and

liquidity.

FACTS

• Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act,

• As per Section 45ZI (1) and (2) of Reserve Bank of India Act, 1934, the Reserve Bank is required to organise at least four meetings of the Monetary Policy Committee in a year and the meeting schedule of the Monetary Policy Committee for a year shall be published at least one week before the first meeting in that year.

• It is framed in every 2 months and so it is known as bimonthly monetary policy

• The committee that frames monetary policy is known as MPC- MONETARY POLICY COMITTEE

MPC MEMBERS

• MPC, includes 6 members, 3 from RBI and 3 appointed by GoI

• The members are:

• Governor of the Reserve Bank of India – Chairperson, ex officio -Shaktikanta Das.

• Deputy Governor of the Bank in charge of monetary policy — Michael Debrata Patra.

• Executive director of the Bank in charge of monetary policy — Janak Raj

MEMBERS APPOINTED BY GoI

• Ravindra Dholakia

• Chetan Ghate

• Pami Dua

TOOLS OF MONETARYPOLICY

• The tools are divided as follows

• Quantitative tool, which consists of:

• DIRECT AND INDIRECT TOOLS:

• DIRECT consists of- CRR,SLR, REFINANCE

• INDIRECT- REPO RATE, REVERSE REPO RATE, BANK RATE,

MSF, OMO,MSS, TERM REPO

TOOLS OF MONETARYPOLICY

• QUALITATIVE TOOLS onsists of-

• MORAL SUASSION

• PENALTY

• DIRECT ACTION

• CONSUMER CREDIT CONTROL

• LOAN TO VALUE RATIO

CRR, SLR AND REFINANCE

• WHAT IS CRR?

• CASH RESERVE RATIO IS:

• A portion of NDTL

• Reserved with RBI

• In form of cash

• It is defined under section 42 of RBI Act 1934

CRR, SLR AND REFINANCE

• WHAT IS SLR?

• STATUTORY LIQUIDITY RATIO IS:

• A portion of NDTL

• Reserved with bank

• In form of cash, gold, government securities

• It is defined under section 24 of Banking Regulation Act 1949

What are REPO, REVERSE REPO,BANK

RATE AND MSF?

• Repo rate refers to the rate at which commercial banks borrow money by

selling their securities to the Central bank of our country i.e Reserve Bank of

India (RBI) to maintain liquidity, in case of shortage of funds or due to

some statutory measures. It is one of the main tools of RBI to keep inflation

under control.

What are REPO, REVERSE REPO,BANK

RATE AND MSF?

• Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus

restricting the borrowing power of investors.

• Current rate- 4.40%

• Reverse Repo Rate is when the RBI deposits surplus money od commercial

banks. The banks benefit out of it by receiving interest for their holdings

with the central bank.

• Current rate- 3.75%

What are REPO, REVERSE REPO,BANK

RATE AND MSF?

• Bank rate also known as rediscount rate and penal rate, is the rate at

which bnks rediscount their securities

• Current rate-4.65%

• MSF- Marginal Standing Facility- it is provided by RBI to scheduled

commercial banks where they can borrow from RBI on an overnight

basis.

• Current rate-4.65%

WHAT IS OMO AND MSS?

• An open market operation (OMO) is an activity by a central bank to give (or

take) liquidity in its currency to (or from) a bank or a group of banks

• Market Stabilization scheme (MSS) is a monetary policy intervention by the

RBI to withdraw excess liquidity (or money supply) by selling government

securities in the economy. The MSS was introduced in April 2004. Main thing

about MSS is that it is used to withdraw excess liquidity or money from the

system by selling government bonds

What is 'Operation Twist'?

• 'Operation Twist' is RBI's simultaneous selling of short-term securities and

buying of long term securities through open market operations (OMO).

Under this mechanism, the short-term securities are transitioned into long-

term securities.

• Whenever there is a long-term investment deficit in the country and the

investors are hesitant to make long-term investments in the economy, the

government jumps in to revive growth by lowering the interest rate for long-

term investment ventures.

• RBI purchased govt securities (10-year bonds) worth Rs 10,000 crore and

sold off short-term securities to the tune of Rs 6,825 crore respectively.

• In the latest round, the central bank bought 10-year bonds or securities

worth Rs 10,000 crore and managed to sell short-term securities worth Rs

8,501 crore.

• LTRO is a tool in which central bank offers money to banks for a period of

one to three years at the prevailing repo rate (currently at 5.15 per cent). The

banks in turn offer government securities with same or higher tenure as a

collateral to the central bank

QUALITATIVE TOOLS OF MONETARY

POLICY

• Moral Suassion

• Penalty

• Direct Action

• Loan to Value Ratio

• Consumer Credit Control