RBI and Monetary Policy in India

Presented By:
Shashwat Singh (15BSP1162)
Urvashi Vashisht(15BSP1390)
Sheetal Sharma(15BSP)
Shiraz Hussain(15BSP)
Tamanna Arora(15BSP)
Surbhi Sharma (15BSP)

M1 = Currency with public+

Demand deposits with banks+
Other Deposits with RBI
M2 = M1+ Post Office Deposits
M3 = M1+ Time Deposits with Banks
M4 = M3+ Total Post Office Deposits

The term monetary policy refers to actions

taken by central banks to affect monetary
magnitudes or other financial conditions.
Monetary Policy operates on monetary
magnitudes or variables such as money
supply, interest rates and availability of
credit.
Monetary Policy ultimately operates
through its influence on expenditure flows
in the economy.
In other words affects liquidity and by
affecting liquidity, and thus credit, it
affects total demand in the economy.

Central Bank may directly affect the

money supply to control its growth.
Or it might act indirectly to affect cost and
availability of credit in the economy.
In modern times the bulk of money in
developed economies consists of bank
deposits rather than currencies and coins.
So central banks today guide monetary
developments with instruments that
control over deposit creation and influence
general financial conditions.
Credit policy is concerned with changes in
the supply of credit.
Central Bank administers both the Credit
and Monetary policy

MP is a part of general economic policy of

the govt.
Thus MP contributes to the achievement of
the goals of economic policy.
Objective of MP may be:
Full employment
Stable exchange rate
Healthy BoP
Economic growth
Reasonable Price Stability
Greater equality in
distribution of
income &
wealth
Financial stability

There is convergence of views in

developed and developing economies,
that price stability is the dominant
objective of monetary policy.
Price stability does not mean complete
year-to-year price stability which is difficult
to attain.
Price stability refers to the long run
average stability of prices.
Price stability involves avoidance of both
inflationary and deflationary pressures.

Price Stability contributes improvements in

the standard of living of people.
It promotes saving in the economy while
discouraging unproductive investment.
Stable prices enable exports to compete in
international markets and contribute to
the strengthening of BoP.
Price stability leads to interest rate
stability, and exchange rate stability (via
export import stability).
It contributes to the overall financial
stability of the economy.

Instruments
1. Discount Rate
(Bank Rate)
2.Reserve Ratios
3. Open Market
Operations

Operating
Target
Monetary Base
Bank Credit
Interest Rates

Intermediate
Target
Monetary
Aggregates(M3)
Long term
interest rates

Ultimate
Goals
Total Spending
Price Stability
Etc.

Variations in Reserve Ratios

Discount Rate (Bank Rate)
(also called rediscount rate)
Open Market Operations (OMOs)
Statutory liquidity ratio (SLR)
Credit Ceiling
Credit Authorization Scheme
Repo Rate and Reverse Repo Rate
Other Instruments

Banks are required to maintain a certain

percentage of their deposits in the form of
reserves or balances with the RBI
It is called Cash Reserve Ratio or CRR
Since reserves are high-powered money or
base money, by varying CRR, RBI can
reduce or add to the banks required
reserves and thus affect banks ability to
lend.

Discount rate is the rate of interest charged

by the central bank for providing funds or
loans to the banking system.
Funds are provided either through lending
directly or rediscounting or buying
commercial bills and treasury bills.
Variation in Bank Rate has an effect on the
domestic interest rate, especially the short
term rates.

OMOs involve buying (outright or

temporary) and selling of govt securities by
the central bank, from or to the public and
banks.
RBI when purchases securities, pays the
amount of money by crediting the reserve
deposit account of the sellers bank, which
in turn credits the sellers deposit account in
that bank.

Reserve requirement that the commercial

banks in India require to maintain in the
form of gold, government approved
securities before providing credit to the
customers.
It is called statutory liquidity ratio (SLR)
It is determined by Reserve Bank of India
and maintained by banks in order to control
the expansion of bank credit.

RBI issues prior information or direction that

loans to the commercial banks will be given
up to a certain limit.
It is known as Credit Ceiling.
Few examples of ceiling are agriculture
sector advances, priority sector lending.

Credit Authorization Scheme was introduced

in November, 1965.
This instrument of credit regulation RBI as
per the guideline authorizes the banks to
advance loans to desired sectors.

Repo rate is the rate at which RBI lends to

commercial banks generally against
government securities.

Reverse Repo rate is the rate at which RBI

borrows money from the commercial banks.

Indicator

Current rate

Inflation

6.00%

Bank rate

7.75%

CRR

4.00%

SLR

21.50%

Repo rate

6.75%

Reverse repo rate

5.75%

Expansionary monetary policy makes it

possible for more investments come in and
consumers spend more.
Lowered interest rates also lower mortgage
payment rates.
It allows the Central Bank to apply
quantitative easing.
It promotes predictability and transparency

Banks lowering the interest rates on

mortgages and loans.
Business owners will be encouraged to
expand their businesses.
More available funds to borrow with interest
rates that can afford.
Prices of commodities will be lowered and
the buying public will have more reason to
buy more consumer goods.

lowered rates is that it also affects the

payments home owners need to meet for
the mortgage of their homes.
Reduced mortgage fees will leave home
owners more money to spend.
This is a win-win situation for
merchandisers, creditors and property
investors as well.

The Federal Reserve can make use of this

policy to print or create more money which
enables it to purchase government bonds
from banks.
Result is increased cash reserves in banks
and also monetary base.
Leads to reduced interest rates and more
money for the bank to lend its borrowers.

1. Despite expansionary monetary policy,

there is still no guaranteed economy recovery.
Some economists who criticize the Federal
Reserve on the policy say that in times of
recession, not all consumers will have confidence
to spend and take advantage of low interest
rates. If this is the case, then it is a disadvantage.
2. Cutting interest rates is not a guarantee.
Others also claim that even if the banks are given
lower interest rates by the Central Bank when
they borrow money, some banks might have the
funds. If this happens, there will be insufficient
funds people can borrow from them.

3. It will not be useful during global recession.

Proponents of expansionary monetary policy say that even
if banks will lower interest rates and more consumers will
spend money, during a global crisis, the export industry
might suffer. They say that if this is the current situation,
the losses of exporters are more than what businesses can
earn from sales.
4. Contractionary monetary policy can discourage
businesses from expansion.
Opponents claim that if the Federal Reserve will impose this
policy, interest rates will increase and businesses will not
be interested to expand their operations. This can lead to
less production of manufacturers and higher prices.
Consumers might not be able to afford goods and services.
Worse, it might take a long time for these businesses to
recover and eventually force them to close shop. If this
continues, workers might lose their jobs.

The fiscal and monetary policies of the

nation are the two measures, which can
help in bringing stability and developing
smoothly.
Fiscal policyis the policy relating to
government revenues from taxes and
expenditure on various projects.
Monetary Policy, on the other hand is
mainly concerned with the flow of money in
the economy.

BASIS FOR
COMPARISON
Meaning

FISCAL POLICY

MONETARY POLICY

The tool used by the

government in which it
uses its tax revenue and
expenditure policies to
affect the economy is
known as Fiscal Policy.

The tool used by the

central bank to regulate
the money supply in the
economy is known as
Monetary Policy.

Administered by

Ministry of Finance

Central Bank

Nature

The fiscal policy changes

every year.

The change in monetary

policy depends on the
economic status of the
nation.

Related to

Government Revenue &

Expenditure
Economic Growth

Banks & Credit Control

Focuses on

Economic Stability

Policy instruments

Tax rates and government Interest rates and credit

spending
ratios

Political influence

Yes

No

The goals of the monetary policy and fiscal

policy are the same which is to promote
stable and growing economic conditions in
an economy, but the instruments used to
carry these out and the bodies that carry
these out are different.
They should be in synch to work well and
such that actions of one dont scuttle the
actions of another and they succeed in their
goals of maintaining a reasonable level of
inflation and steady economic growth.