p


..
.
  
 1. Price stability
 2. Credit availability
 3. Stability of Exchange Rate
 4. Full Employment
 5. High Rate of Economic Growth
 6. Distribution of Money.
.


„o ensure price stability in the
economy.
 Factors include to ensure stability in
the economy:
 1. Money supply, commonly referred to
as M3.
 2. Interest rates
 3. Inflation.
.
 RBI has been using different control
measures, popularly called µCredit
Control¶ measures.
 „hese control measures can be
classified into two categories --------
 1. General (Quantitative) Controls.
 2. Selective(Qualitative) Controls.
<

 <

General Controls affect the total

quantity of credit and the economy
generally.
.
 <
p!
 (a) Bank Rate
 (b) Repo Rate
 (c ) Reverse Repo Rate
 (d) Open Market Operations
 (e) CRR
 (f) SLR
 (g) Refinance policy
.
 6"is the rate at which
central bank of the country (in India
it is RBI) allows finance to
commercial banks.
 Bank Rate is a tool, which central
bank uses for short-term purposes

 ghenever the banks have any #$
#%it from RBI.
 is the rate at which our
banks borrow rupees from RBI.
 #%
#"$
#&
 ghen the repo rate increases borrowing
from RBI becomes more expensive.
.
 '#$'
 Essentially, a repurchase agreement
is an agreement between one party
and another in which the former sells
a security (like a bond) to the latter
with a promise to buy it back after a
particular period.
.
 à(a bank may enter into
a repo with RBI, selling a security to
RBI and then tell RBI that I will buy
this security back from you after 3-
months.
 RBI tells the bank...OK I will pay Rs.
100 for this security now but when
you buy it back from me, please pay
me Rs. 103.
.
 Generally, 
$$)
#&
 ghile a "#
%$for
banks, repo rates have a more of a
fine-tuning(minor change or
modification) impact.
.
 à#(
 #*$
and are entered into by banks 
#*#
#)&

 is the rate at
which Reserve Bank of India (RBI)
%"&
 Banks are always happy to lend
money to RBI since their money are
in safe hands with a good interest.
 An increase in Reverse repo rate can
cause the banks to transfer more
funds to RBI due to this attractive
interest rates.
.
 rate is the rate at
which ""##*
+)%##6
&
 „he 6
#when it feels
there is #$
#"$&
.
 An #
 that the 6
%
%#"
#$# &
 As a result, banks would 
"#%##6

.
 
 „he system of 
6
to Commercial Banks 
#&
 Over the years, the Commercial
Banks dependence on RBI for
refinance has come down except in
case of ,
$-&
.
 u
  


refers to a portion of deposits (as
cash) which banks have to
keep/maintain with the RBI.
 „his serves two purposes.
m

 m

ghen there is a #$
available for the
business sector,
 the $$
tend to
capture the lions share in the total
institutional credit.
.
 ((priority
(( sectors and
essential industries are
starved(hungry) of necessary funds,
 %##"$#
*&
.
 In order to curb this tendency, the
central bank resorts to credit
rationing measures.
 <%
********
 1. imposition of upper limits on the
credit available to large industries
and firms.
.
 2. Charging a #$#$
on the bank loans
&
 „his is done with a view to making
"$#
&
p
 „gO important tools
of macroeconomic
policy are p
à
&
.

 „he p  has

become dynamic in nature
as RBI reserves its right
to alter it from time to
time, depending on the
state of the economy.
.

 „he Y 
regulates the supply of
money and the 
in the
economy.
.
 It deals with both $
and %$ rates of
interest for commercial
banks.
.

 #p
(

$%#&

 „
    

Y  
Y Y  p 

.

 It can increase or decrease

the supply of currency as
well as ------------------------
-----------interest rate, carry
out open market operations,
control credit and vary the
reserve requirements.
.

 „HE Monetary Policy is different

from Fiscal Policy as the ---------
-------------------------------------
----------Monetary Policy brings
about a change in the economy
by changing 
&
.

 g#fiscal policy
is a broader tool with
the government.
.

 „HE Fiscal policy

used to overcome
recession and control
inflation.
.

 à It may
be defined as the deliberate
change in government
revenue and expenditure to
influence the level of
national output and prices.
.

 FOR Instance , at the time

of  the
government can increase
expenditures or cut taxes
in order to $
&
.

 ON the other hand, the

government can reduce
its expenditures or raise
taxes during 
&
.

 Fiscal Policy aims at

changing aggregate
demand by suitable
#$ in the

 Y   
  
.

 ./
6$#%#
$0à
&
p

 A reduction in interest
rates would force banks
to lower their lending
rates and borrowing
rates.
.

 So if you want to place

a deposit with a bank
or take a loan, it would
offer it at a lower rate
of interest.
.

 On the other hand, if

there were to be an
increase in interest rates,
banks would immediately
increase their lending and
borrowing rates.
.

 Since the rates of interest

affect the borrowing costs
of corporate and as a
result, their bottom lines
(profits), the Y 

Y 
 Y
.

 Since the financial sector reforms

commenced------------------------
-----
 the RBI has moved towards a
market-determined interest rate
scenario.
 „his means that    
        
 Y   
.

 Being the central bank,

however, the 6
%
#  and
determine direction on
interest rates as it is an
important  
  
m p  !p

 

 1.It ensures that a portion of bank

deposits is totally risk-free
 2.and secondly it enables that RBI
control liquidity in the system, and
thereby, inflation.
.

    u
banks
are required to invest a
portion of their deposits in
government securities as
a part of their 
 
requirements.
.

    !!
as the economy has

recovered and sector reforms
increased----------------
 the CRR has fallen from 15 per
cent in March 1991 to 5.5 per
cent in December 2001.
 „he SLR has fallen from 38.5 per
cent to 25 per cent over the past
decade.
.

 Lowering of CRR means

that more money comes
into circulation. CRR is
currently 5%.
.

"g#
#1

 From time to time, RBI

prescribes a CRR or the
minimum amount of cash that
banks have to maintain with it.
.
 „he CRR is fixed as a
percentage of total deposits.
 As more money chases the
same number of borrowers,
interest rates come down.
.

 ghenever you see an

increase on inflation,
there will be an increase
of interest rate also.
.
 CRR and SLR is the same -------------
------ they #
"+
to business and industry and
thus are ------ *&
.

 pm p2!
 „his refers to the total
volume of money circulating
in the economy,
.

 and conventionally
comprises -------currency
with the public and demand
deposits (current account +
savings account) with the
public.
.

 „he RBI has adopted

four concepts of
measuring money
supply.
.
 #p3( which
equals the sum of currency
with the public, demand
deposits with the public and
other deposits with the
public.
.

 Simply put M1 includes ---

------------ all coins and
notes in circulation, and
personal current accounts.
.

 #(p4( is a
measure of money
supply,
 including M1,
 plus personal deposit
accounts
.

 plus government
deposits and deposits
in currencies other than
rupee.
.

 ##p2
or the broad money
concept, as it is also
known, is quite
popular.
.

 M3 includes net time

deposits (fixed deposits),
savings deposits with
post office saving banks
and all the components of
M1.
.

 m )
m !
 Banks in India are required to
maintain 25 per cent of their
demand and time liabilities in
government securities and certain
approved securities.
 
 ghenever the banks have
any shortage of funds they
can borrow it from RBI.
 Repo rate is the rate at
which our banks borrow
rupees from RBI.

.

"
the rate at which the RBI
lends #*",
now stands at 5%
 and the



"
the rate at
which the RBI borrows from banks,
now stands at 3.5%.
 „his is the second rate cut by the RBI
this calendar year.
.
 A reduction in the repo rate will
help banks to get money at a
cheaper rate.
 ghen the repo rate increases
borrowing from RBI becomes
more expensive.
.
  is the rate at which
the RBI borrows from the banks.
.
 S 
   rate is the
interest rate earned by a bank for
lending money to the RBI in
exchange for Government
securities.
.
 „he present




" #„
is 3.5%.
(Dated 05-
05-03-
03-09)
.
 gith the rate cuts now, the
cost of funds could become
cheaper and liquidity ample.
.

 p" 
 An important instrument of
credit control,
 the Reserve Bank of India
purchases and sells
securities in open market
operations.
.

 p" is
the buying and selling of
securities (normally
Government securities) by a
    Y 
in order to increase or decrease
the outstanding supply of bank
reserves.
.

 In times of inflation,  

securities to mop up the excess
money in the market.
 Similarly, to increase the
supply of money, 
 securities.
 35*54*4535
 Bank Rate : 6.0%
 Repo Rate : 4.75% ,
„he policy rates, both the repo rate and
the reverse repo rate have been
retained at their current levels.
.
 Reverse Repo Rate : 3.25%
 CRR : 5.75% ,
As a result of the CRR increase,
about Rs.36,000 crore of excess
liquidity will be absorbed from the
system.
 SLR : 25.0%
.
 PLR (Prime lending rate):
12.75% ------- 13.25%
 Savings Bank Rate : 3.5%
 Deposit Rate : 7.50% ------
9.60%
.
 Assuming a near zero growth in
agricultural production and continued
recovery in industrial production and
services sector activity,
 the baseline projection for GDP
growth for 2009-10 is now raised to
7.5 per cent.
.
 Looking ahead to 2010-11, our
preliminary assessment of the
baseline scenario is that the current
$%#%&
 ge shall formally indicate our growth
projection for 2010-11 in April 2010.