2/8/2017 MonetarypolicyofIndiaWikipedia

MonetarypolicyofIndia
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Monetarypolicyistheprocessbywhichmonetaryauthorityofacountry,generallycentralbankcontrolsthe
supplyofmoneyintheeconomybyitscontroloverinterestratesinordertomaintainpricestabilityand
achievehigheconomicgrowth.[1]InIndia,thecentralmonetaryauthorityistheReserveBankofIndia(RBI).It
issodesignedastomaintainthepricestabilityintheeconomy.Otherobjectivesofthemonetarypolicyof
India,asstatedbyRBI,are:

PriceStability
PriceStabilityimpliespromotingeconomicdevelopmentwithconsiderableemphasisonpricestability.
Thecentreoffocusistofacilitatetheenvironmentwhichisfavourabletothearchitecturethatenablesthe
developmentalprojectstorunswiftlywhilealsomaintainingreasonablepricestability.

ControlledExpansionOfBankCredit
OneoftheimportantfunctionsofRBIisthecontrolledexpansionofbankcreditandmoneysupplywith
specialattentiontoseasonalrequirementforcreditwithoutaffectingtheoutput.

PromotionofFixedInvestment
Theaimhereistoincreasetheproductivityofinvestmentbyrestrainingnonessentialfixedinvestment.

RestrictionofInventoriesandstocks
Overfillingofstocksandproductsbecomingoutdatedduetoexcessofstockoftenresultsinsicknessof
theunit.Toavoidthisproblemthecentralmonetaryauthoritycarriesoutthisessentialfunctionof
restrictingtheinventories.Themainobjectiveofthispolicyistoavoidoverstockingandidlemoneyin
theorganization.

ToPromoteEfficiency
Itisanotheressentialaspectwherethecentralbankspayalotofattention.Ittriestoincreasethe
efficiencyinthefinancialsystemandtriestoincorporatestructuralchangessuchasderegulatinginterest
rates,easeoperationalconstraintsinthecreditdeliverysystem,tointroducenewmoneymarket
instrumentsetc.

ReducingtheRigidity
RBItriestobringabouttheflexibilitiesintheoperationswhichprovideaconsiderableautonomy.It
encouragesmorecompetitiveenvironmentanddiversification.Itmaintainsitscontroloverfinancial
systemwheneverandwherevernecessarytomaintainthedisciplineandprudenceinoperationsofthe
financialsystem.

Contents
1 Monetaryoperations
2 InstrumentsofMonetarypolicy
3 KeyIndicators
4 References
5 Furtherreading

Monetaryoperations
Monetaryoperationsinvolvemonetarytechniqueswhichoperateonmonetarymagnitudessuchasmoney
supply,interestratesandavailabilityofcreditaimedtomaintainPriceStability,Stableexchangerate,Healthy
BalanceofPayment,Financialstability,Economicgrowth.RBI,theapexinstituteofIndiawhichmonitorsand

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regulatesthemonetarypolicyofthecountrystabilizesthepricebycontrollingInflation.RBItakesintoaccount
thefollowingmonetarypolicies:

InstrumentsofMonetarypolicy
Theseinstrumentsareusedtocontrolthemoneyflowintheeconomy,statedfollowing

OpenMarketOperations
Anopenmarketoperationisaninstrumentofmonetarypolicywhichinvolvesbuyingorsellingof
governmentsecuritiesfromortothepublicandbanks.Thismechanisminfluencesthereservepositionof
thebanks,yieldongovernmentsecuritiesandcostofbankcredit.TheRBIsellsgovernmentsecuritiesto
controltheflowofcreditandbuysgovernmentsecuritiestoincreasecreditflow.Openmarketoperation
makesbankratepolicyeffectiveandmaintainsstabilityingovernmentsecuritiesmarket.

CashReserveRatio
CashReserveRatioisacertainpercentageofbankdeposits
whichbanksarerequiredtokeepwithRBIintheformofreserves
orbalances.HighertheCRRwiththeRBIlowerwillbethe
liquidityinthesystemandviceversa.RBIisempoweredtovary
CRRbetween15percentand3percent.Butasperthesuggestion
bytheNarsimhamcommitteeReporttheCRRwasreducedfrom
15%inthe1990to5percentin2002.Asof4October2016,the
CRRis4.00percent.[3]
CRRGraphfrom1992to2011[2]
StatutoryLiquidityRatio
Everyfinancialinstitutionhastomaintainacertainquantityof
liquidassetswiththemselvesatanypointoftimeoftheirtotal
timeanddemandliabilities.Theseassetshavetobekeptinnon
cashformsuchasGsecspreciousmetals,approvedsecurities
likebondsetc.Theratiooftheliquidassetstotimeanddemand
assetsistermedastheStatutoryliquidityratio.Therewasa
reductionofSLRfrom38.5%to25%becauseofthesuggestion
byNarsimhamCommittee.ThecurrentSLRis20.50%.[5]

BankRatePolicy[6]
Thebankrate,alsoknownasthediscountrate,istherateof SLRGraphfrom1991to2011[4]
interestchargedbytheRBIforprovidingfundsorloanstothe
bankingsystem.Thisbankingsysteminvolvescommercialand
cooperativebanks,IndustrialDevelopmentBankofIndia,IFC,
EXIMBank,andotherapprovedfinancialinstitutes.Fundsare
providedeitherthroughlendingdirectlyordiscountingorbuying
moneymarketinstrumentslikecommercialbillsandtreasury
bills.IncreaseinBankRateincreasesthecostofborrowingby
commercialbankswhichresultsinthereductionincreditvolume
tothebanksandhencedeclinesthesupplyofmoney.Increasein
thebankrateisthesymboloftighteningofRBImonetarypolicy.
AsofOctober04,2016bankrateis6.75percent.[7]

CreditCeiling BankRateGraphfrom1991to2011
InthisoperationRBIissuespriorinformationordirectionthat
loanstothecommercialbankswillbegivenuptoacertainlimit.Inthiscasecommercialbankwillbe
tightinadvancingloanstothepublic.Theywillallocateloanstolimitedsectors.Fewexamplesof
ceilingareagriculturesectoradvances,prioritysectorlending.

CreditAuthorizationScheme
CreditAuthorizationSchemewasintroducedinNovember,1965whenPCBhattacharyawasthe
chairmanofRBI.UnderthisinstrumentofcreditregulationRBIaspertheguidelineauthorizesthebanks
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toadvanceloanstodesiredsectors.[8]

MoralSuasion
MoralSuasionisjustasarequestbytheRBItothecommercialbankstotakesoandsoactionand
measuresinsoandsotrendoftheeconomy.RBImayrequestcommercialbanksnottogiveloansfor
unproductivepurposewhichdoesnotaddtoeconomicgrowthbutincreasesinflation.

RepoRateandReverseRepoRate
ReporateistherateatwhichRBIlendstoitsclientsgenerallyagainstgovernmentsecurities.Reduction
inReporatehelpsthecommercialbankstogetmoneyatacheaperrateandincreaseinReporate
discouragesthecommercialbankstogetmoneyastherateincreasesandbecomesexpensive.Reverse
ReporateistherateatwhichRBIborrowsmoneyfromthecommercialbanks.TheincreaseintheRepo
ratewillincreasethecostofborrowingandlendingofthebankswhichwilldiscouragethepublicto
borrowmoneyandwillencouragethemtodeposit.Astheratesarehightheavailabilityofcreditand
demanddecreasesresultingtodecreaseininflation.ThisincreaseinRepoRateandReverseRepoRateis
asymboloftighteningofthepolicy.

KeyIndicators
Asof15January2017,thekeyindicatorsare[9][10]

Indicator Currentrate
Inflation 7.50
Bankrate 6.75%[11]
CRR 4.000%
SLR 20.50%
Reporate 6.25%[12]
Reversereporate 5.75%
MarginalStandingfacilityrate 6.75%[13]

RecentlyRBIsignedanagreementwithcentralgovernmentcalledMonetarypolicyframeworkconventionon
20Feb,2015thatputsresponsibilityonrbitotargetmaximumtolerableinflation(cpi)toachievepricestability.
FortheaboveframeworkrbiintroducedafinancebillinIndianbudgetfy201617tocoverstatutorybaking.

RBIMONETARYPOLICYCOMMITTEE

RecentlygovernmentformedrbipolicycommitteevizMonetarypolicycommittee(MPC)withsixmembers
groupsimilartoUSAfomcwith12members.INthis3membersfromRBIandthreeexpertmemberswillbe
nominatedbygovernment.SoRBIgovernorabsolutevetoisnomoretherewiththiscommitteebutwhen
everthereistiei.e3:3,Thengovernorcanuseextravotetobraketie.Presentcommitteetargetedinflation
rateis4percentwithmeandeviationof2percentsoitstandsbetween2to6percent.

References
1.Investopedia:MonetaryPolicy(http://www.investopedia.com/terms/m/mo
netarypolicy.asp#ixzz1aDVp7Xj8) WikimediaCommonshas
2.CRRDATATAKENFROMRBI(http://www.rbi.org.in/scripts/chro_ban mediarelatedtoMoneyof
krate.aspx) India.
3.[1](http://www.rbi.org.in/home.aspx)
4.SLRDatafromRBI(http://www.rbi.org.in/scripts/chro_bankrate.aspx)
5.https://rbidocs.rbi.org.in/rdocs/Wss/PDFs/5TB4828141FBB549A7ACE96116ED78E69C.PDF
6.BankratedatatakenfromRBI(http://www.rbi.org.in/scripts/chro_bankrate.aspx)
7.[2](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10331&Mode=0)
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8.CREDITAUTHORIZATIONSCHEMECAMEINTOEXISTENCEDURINGTHETENUREOFPC
BHATTACHARYA(http://www.rbi.org.in/scripts/governors.aspx#bhatt)
9.CurrentPolicyRates,ReserveRatio(http://www.rbi.org.in/home.aspx),ReserveBankofIndia
10.KeyIndicators(http://www.indiabulls.com/securities/market/Useful_Information/Credit_Policy_10_11/quarter/CPR_1
Q_FY10.htm),IndiaBulls.com
11.ChangeinBankRateasperRBInotification(https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10331&Mode=
0)
12.[3](http://www.moneycontrol.com/news/economy/rbicutsreporateby25bpsto625_7569001.html)
13.[4](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10329&Mode=0)

Furtherreading
CRR,SLR,RepoRateHistoricalCharts(http://craytheon.com/charts/rbi_base_rate_repo_reverse_rate_cr
r_slr.php)

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