Monetary policy of India

S.BharathiB.S ABM

Aman SharmaDept. of Business Administration .NIT,KKR

Presented By

INTRODUCTION

Fiscal Policy:It is the budgetary stance of Central Govt. decision to decide the taxation rate (Income) and expenditure policy for a Financial year. Generally, it is formulated annually.

Monetary Policy:It is the Central Govt. policy w.r.t. the quantity of money in the economy, the rate of interest & the exchange rate executed through Central Bank as RBI in India. Monetary Policy is changed

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AT PRESENT RBI GOVERNER

RAGHU RAM RAJAN

Objectives

• Maintaining price stability• Ensuring adequate flow of credit to the

productive Sectors of the economy to support economic growth

• Rapid economic growth• Full employment• Equal income distribution

Methods to achieve objectives

These methods can be categorized as: – General/ quantitative methods – Selective/ qualitative methods

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Money Control in an Economy

Qualitative Control : Through this measure Central Govt notifies priority sectors forlending. Ex. – Agri Sector, Small Scale Industries & Handloom Sector etc. Quantitative Control : Through this measure Central Bank decides various rates to control flow of money in economy. These are generally used as means of inflation control.

•CASH RESERVE RATIO

CRR

•STATUTORY LIQUIDITY RATIOSLR•BANK RATEB R

R R

RRR

MSF

BA

Tools Of Quantitative Control

• REPO RATE

REVERSE REPO RATE

MARGINAL STANDING FACILITY

BASE RATE

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CRR CASH RESERVE RATIO

CRR is the ratio of Bank’s total NDTL (Net Demand & Time Liabilities)with the RBI in the form of cash reserves. This was fixed to be in the range of 3% to 15% (1956). A recent Amendment (2007) has removed the 3 percent floor and provided a free hand to the RBI in fixing the CRR.An increase in CRR sucks the amount from the economy while a decrease injects the amount into the economy.

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SLR STATUTORY LIQUDITY RATIOSLR is the ratio of Bank’s total NDTL (Net Demand & Time Liabilities) in the form of cash reserves, Gold, Unencumbered securities. This must be kept by the bank. This was fixed to be in the range of 20% to 25% .At present it is 21.5 %

SLR = (Liquid Assets/NDTL)*100 An increase in SLR sucks the amount from the economy while a decrease injects the amount into the economy.

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BANK RATE

The interest rate which the RBI charges on its long- term lending is known as the Bank Rate. The clients who borrow through this route are the GOI, state govt., bank, financial institution, co-operative bank, NBFCs,etc.The rate has direct impact on the lending activities of the concern lending bodies operating in the Indian financial system.Currently, Bank Rate is 7.75 %.

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REPO RATEThe interest rate which the RBI charges from Commercial Banks on its short -term lendings to them is known as the Repo Rate. At present it is 6.75 % .The concept of REPO RATE was introduced in December 1992.

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REVERSE REPO RATEIt is the rate of interest at which RBI pays to its clients who offer short term deposits to it. At present the rate is 5.75%.It is the reverse of the repo rate & this concept was introduced in 12 November 1996 by the RBI.

Use of this tool :- This tool is utilized by the RBI in the wake of over money supply with the Indian bank .It has emerged as very important tool in the direction of following cheap interest regime- the general policy of the RBI since reform process started.

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