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o Exchange Rate Stability: If exchange rate of an economy is stable it
shows that economic condition of the country is stable. Monetary policy
aims at maintaining the relative stability in the exchange rate. The RBI by
altering the foreign exchange reserves tries to influence the demand for
foreign exchange and tries to maintain the exchange rate stability.
o It generates employment: Monetary policy can be used for
generating employment. If the monetary policy is expansionary then credit
supply can be encouraged. It would thus help in creating more jobs in
different sector of the economy.
o Equitable distribution of income: Earlier many economists used to
justify the role of the fiscal policy in maintaining economic equality.
However, in recent years economists have given the opinion that the
monetary policy can play a supplementary role in attainting economic
equality.
These are the instruments of monetary policy that affect over all supply of
money/credit in the economy. Some are as follows:
Statutory Liquidity Ratio:
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The Cash Reserve Ratio (CRR) is the ratio fixed by the RBI of the total
deposits of a bank in India, which is kept with the RBI in cash form.
CRR deposits do not earn any interest for banks.
Initially, limits of 4% (lower) and 20% (upper) were set for CRR, but
respective amendments removed the limits, therefore providing RBI with
much needed operational flexibility. The more the CRR the less the money
available for lending by the banks to players in the economy. RBI increases
CRR to tighten many supple and lowers CRR to expand credit in the
economy.
CRR as a tool of monetary policy is used when there is a relatively serious
need to manage credit and inflation.
Otherwise, RBI relies on signaling its intent through the policy rates of repo
and reverse repo. At present it is 4 percent.
Bank Rate:
In basic terms, bank rate is the interest rate at which RBI provides long term
credit facility to commercial banks. A change in bank rate affects the other
market rates of interest. An increase in bank rate leads to an increase in
other rates of interest, and conversely, a decrease in bank rate results in a
fall in other rates of interest. Bank rate is also referred to as the discount
rate. A deliberate manipulation of the bank rate by the Reserve Bank to
influence the flow of credit created by the commercial banks is known as
bank rate policy.
An increase in bank rate results in an increase in the cost of credit or cost of
borrowing. This in turn leads to a contraction in demand for credit. A
contraction in demand for credit restricts the total availability of money in
the economy, and hence results as an anti-inflationary measure of control.
Likewise, a fall in the bank rate causes other rates of interest to come down.
The cost of credit falls, i.e., borrowing becomes cheaper. Cheap credit may
induce a higher demand both for investment and consumption purposes.
More money through increased flow of credit comes into circulation. A fall
in bank rate may, thus, prove an anti-deflationary instrument of control.
Penal rates are linked with Bank Rates. For instance if a bank does not
maintain the required levels of CRR and SLR, then RBI can impose penalty
on such banks. Currently Bank Rate is 7%.
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Nowadays, bank rate is not used as a tool to control money supply, rather
Liquidity Adjustment Facility (LAF) (Repo Rate) is used to control the
money supply in economy.
Repo Rate:
If the RBI wants to make it more expensive for the banks to borrow money,
it increases the repo rate.
Similarly, if RBI wants to make it cheaper for banks to borrow money, it
reduces the repo rate. Repo rate stood at 5.75%.
Reverse Repo is the rate at which the Central Bank (RBI) borrows from the
market. This is called as reverse repo as it the reverse of repo operation.
Reverse repo rate at present is 50 basis points (or 0.5%) lower than the Repo
Rate. Repo and Reverse
Repo Rates are also referred to as the Policy rates and are often used by the
Central Bank (RBI) to send single to the financial system to adjust their
lending and borrowing operations.
Repo rates and reverse repo rates form a part of the liquid adjustment
facility.
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Marginal Standing Facility:
These are those tools through which the Central Bank not only controls the value
of loans but also the purpose for which these loans are assigned by the commercial
banks. Some of these are:
Moral Suasion:
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to counter defiation Central Bank persuades the commercial banks to extend
credit for different purposes.
Under Moral Suasion, RBI issues periodical letters to bank to exercise
control over credit in general or advances against particular commodities.
Periodic discussions are held with authorities of commercial banks in this
respect.
In India, from 1949 onwards the Reserve Bank has been successful in using
the method of moral suasion to bring the commercial banks to fall in line
with its policies regarding credit.
Rationing of credit:
Rationing of credit is a method by which the Reserve Bank seeks to limit the
maximum amount of loans and advances, and also in certain cases fix
ceiling for specific categories of loans and advances. RBI also makes credit
flow to certain priority or weaker sectors by charging concessional rates of
interest. This is at times also referred to as Priority Sector Lending.
Direct action:
This method is adopted when a commercial bank does not co-operate with
the central bank in achieving its desirable objectives. Direct action may be
as:
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o Central banks may charge a penal rate of interest over and above the
bank rate upon the defaulting banks;
o Central bank may refuse to rediscount the bills of those banks which
are not following its directives;
o Central bank may refuse to grant further accommodation to those
banks whose borrowings are in excess of their capital and reserves.
Margin Requirements:
The existence of black money in the economy limits the working of the
monetary policy. Black money is not recorded since the borrowers and
lenders keep their transactions secret.
Informal money lenders on a large scale in countries like India but they are
not under the control of the monetary authority. This factor limits the
effectiveness of monetary policy in such countries.
An important limitation of monetary policy arises from its conflicting
objectives. To achieve the objective of economic development, the monetary
policy is to be expansionary but contrary to it is to achieve the objective of
price stability and curb on inflation. It can be realized by contracting the
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money supply. The monetary policy generally fails to achieve a proper
coordination between these two objectives.
Another limitation of monetary policy in India is underdeveloped money
market. The weak money market limits the coverage, as also the effecient
working of the monetary policy.
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Background: Since April 2009, India was a member of the international
agency looking into the issue, namely, Financial Stability Board.
High Level Coordination Committee on Financial Markets (HLCCFM), was
the agency facilitating regulatory coordination, informally
HLCCFM was the forum to deal with inter-regulatory issues arising in the
financial and capital markets, as India follows a multi-regulatory regime for
financial sector. It functioned under the Chairmanship of Governor (RBI),
with Chairman (SEBI) Secretary (Economic Affairs, Ministry of Finance),
Chairman (Insurance Regulatory and Development Authority) and
Chairman (Pension Fund Regulatory Development Authority- PFRDA) as
members.
However, it was an informal body and had its own limitations despite being
a good mechanism. In the absence of formal instruments, clear
specifications as to its functions/powers and an empowered secretariat to
nominate and follow up on the decisions of the HLCCFM, its effectiveness
has been limited.
The markets that are regulated by members of the HLCCFM have
dramatically changed since 1992. Over time, markets have become more
complex and converged and are becoming increasingly integrated. In such a
scenario, if the regulators do not take an integrated and holistic view, it was
felt that outcomes will be sub-optimal.
Various Governmental Committees, as given below, have also
recommended such an approach to regulation:
o RBI’s Advisory Group on Securities Market Regulation (RBI-
AGSMR 2001);
o High Level Expert Committee on Making Mumbai an International
Financial Centre (MIFC 2007);
o Committee on Financial Sector Reforms (CFSR 2008);
o Committee on Financial Sector Assessment (CFSA 2009).
With a view to strengthen and institutionalize the mechanism for
maintaining financial stability and enhancing inter-regulatory coordination,
Indian Government setup an apex-level Financial Stability and Development
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The commodities markets regulator, Forward Markets Commission (FMC)
was added to the FSDC in December 2013 subsequent to shifting of
administrative jurisdiction of commodities market regulation from Ministry
of Consumer Affairs to Ministry of Finance.
Mandate: The Council would monitor macro prudential supervision of the
economy, including the functioning of large financial conglomerates. It will
address inter-regulatory coordination issues and thus spur financial sector
development. It will also focus on financial literacy and financial inclusion.
What distinguishes FSDC from other such similarly situated organizations
across the globe is the additional mandate given for development of
financial sector.
About
The Economic Survey 2020 made a unique attempt to quantify the cost
incurred in putting together one complete home-made meal — the healthy
Indian thali.
Thali prices represent the total money spent on preparing dishes for a meal
in a household.
o Thalinomics captures the economics of a plate of food in India.
Rise in Affordability: Despite recent concerns about rising food prices, the
Economic Survey has stated that for a worker, a vegetarian thali is 29%
more affordable since 2006-07. And affordability of anon-vegetarian thali
improved by 18 per cent.
o It also looked at an industrial worker’s ability to pay for two thalis a
day for his/her household of five individuals.
Conclusion: Basically the survey attempts to calculate the cost that an
average worker incurs based on his actual plate of food in India.
o And on calculating that cost, the survey concludes that works were
able to save due to moderation in prices of items that form part of a
regular Indian thali.
Calculations
The analysis is based on data on prices taken from the Consumer Price
Index for Industrial Workers (CPI IW) for around 80 centres in 25
States/UTs from April 2006 to October 2019.
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The survey took into account the prices of cereals (rice/
wheat), sabzi (vegetables, other ingredients), dal (pulses with other
ingredients) as well as the cost of fuel.
In a non-vegetarian thali, pulses are replaced by 60 gm of non-vegetarian
components keeping in mind prices of eggs, fresh fish and goat meat.
It also took into consideration prices of ingredients such as spices and
condiments such as mustard oil, coconut oil and groundnut oil, turmeric and
chillies.
For fuel, cooking gas prices as well as firewood prices were taken into
consideration.
State-wise performance
Across the board gains: Both across India and the four regions– North,
South, East and West – we find that the absolute prices of a vegetarian Thali
have decreased since 2015-16 though it increased during 2019.
o Exception: Gains are observed across regions, with the exception
of the Northern Region and Eastern Region in 2016-17 in the case
of vegetarian Thali.
Southern region with highest gains: The highest gain in any year was in
the Southern region for a vegetarian Thali in 2018-19 of around 12 per cent
of annual earnings of a worker.
Jharkhand thali the cheapest: Jharkhand emerged as the State with
cheapest vegetarian thali during April-October 2019.
o Two vegetarian thalis for a household of five in Jharkhand required
about 25 per cent of a worker’s daily wage.
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Fall in prices: Survey said there was a shift in the dynamics of thali prices
from 2015-16. Gains are due to significant moderation in prices of
vegetables and dal from 2015-16 when compared to the previous trend of
increasing prices.
Reasons for gains due to reform measures: Many reform measures were
introduced during the period of analysis to enhance the productivity of the
agricultural sector as well as efficiency and effectiveness of agricultural
markets for better and more transparent price discovery:
o PradhanMantriAnnadataAaySanraksHanAbhiyan (PM-AASHA).
o PradhanMantriKrishiSinchayeeYojana (PMKSY) - Per DropMore
Crop.
o PradhanMantriFasalBimaYojana (PMFBY).
o Soil Health Card.
o E-National Agricultural Market (e-NAM).
o National Food Security Mission (NFSM).
o National Food Security Act (NFSA).
Recent trend is inflationary: Survey shows that accelerating food
inflation over the last few months has broken the earlier trend.
o Workers are now forced to use an increasing share of their wages on
food.
Challenges
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overseas investors towards its upcoming asset monetization
programmes.
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Procedure and Guidelines: Guidelines for asset monetisation programme
include principles and mechanism for capital restructuring of CPSEs
regarding payment of dividend, issue of bonus shares, and buyback of
shares by CPSEs.
o It shall apply to all corporate bodies where government of India has
controlling interest.
o The focus of these guidelines is on optimum utilization of funds by
CPSEs to spur economic growth.
Asset Monetization is a way of getting more cash on the balance sheet and
reducing the debt-to-capital ratios that are crucial to rating agencies.
o Sale proceeds (for example, disinvestment proceeds) can be used to
acquire additional operations, stabilize costs, or revitalize existing
properties, retire existing debt to increase revenue production; there
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FAME India is a part of the National Electric Mobility Mission Plan. Main
thrust of FAME is to encourage electric vehicles by providing subsidies.
The Phase-I of this Scheme was initially launched for a period of 2 years,
commencing from 1stApril 2015, which was subsequently extended from
time to time and the last extension was allowed up to 31st March 2019.
The 1stPhase of FAME India Scheme was implemented through four focus
areas namely:
o Demand Creation
o Technology Platform
o Pilot Project
o Charging Infrastructure
Market creation through demand incentives was aimed at incentivizing all
vehicle segments i.e. 2-Wheelers, 3-Wheelers Auto, Passenger 4-Wheeler
vehicles, Light Commercial Vehicles and Buses.
FAME II will cover buses with EV technology; electric, plug-in hybrid and
strong hybrid four wheelers; electric three-wheelers including e-rickshaws
and electric two-wheelers.
Under the second phase of the Faster Adoption and Manufacturing of
Electric Vehicles in India (FAME-II) scheme, 10 lakh registered electric
two-wheelers with a maximum ex-factory price will be eligible to avail
incentive of Rs 20,000 each.
It will also support 5 lakh e-rickshaws having ex-factory price of up to Rs 5
lakh with an incentive of Rs 50,000 each.
FAME-II will offer an incentive of Rs 1.5 lakh each to 35,000 electric four-
wheelers with an ex-factory price of up to Rs 15 lakh, and incentive of Rs
13,000 each to 20,000 strong hybrid four-wheelers with ex-factory price of
up to Rs 15 lakh.
It will support 7,090 e-buses with an incentive of up to Rs 50 lakh each
having an ex-factory price of up to Rs 2 crore
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As many as 317 EV charging stations have been allotted in Maharashtra,
266 in Andhra Pradesh, 256 in Tamil Nadu, 228 in Gujarat, 205 in
Rajasthan, 207 in Uttar Pradesh, 172 in Karnataka, 159 in Madhya Pradesh,
141 in West Bengal, 138 in Telangana, 131 in Kerala, 72 in Delhi, 70 in
Chandigarh, 50 in Haryana, 40 in Meghalaya, 37 in Bihar, 29 in Sikkim, 25
each in Jammu & Kashmir and Chhattisgarh, 20 in Assam, 18 in Odisha and
10 each in Uttarakhand, Puducherry and Himachal Pradesh.
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