A Presentation

on

GROUP NO. :- 9

RBI
POLICY

Presented By:
PRESENTED IN CLASS
OF:
ABHINAV KAPDIYA

DRIPAL PATEL-5188
KINJAL MAKWANA5022
HELLY MODI-5026
AASHAL SHAH-5054
CHARMI SHAH-5057
SONU SHAH-5064

Flow of presentation
Introduction.
History.
Functions.
Roles of RBI.
Credit Creation.
Fiscal Policy.
Monetary Policy

INTRODUCTION TO RBI
Established in April 1935 under the RESERVE
BANK OF INDIAN ACT
Head Quarters MUMBAI (Maharashtra).
The Reserve Bank of India is the central
banking institution of India and controls the
monetary policy of the rupee as well as
US$300.21 billion (2010) of currency
reserves.
Present Governor D. Subbarao.

History Of RBI
It was set up on the recommendations of Hilton
Young Commission
It was started as share-holders bank with a paid
up capital of 5 crores
Initially it was located in Kolkata
It moved to Mumbai in 1937
Initially it was privately owned

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Since 1949, the RBI is fully owned by the

Government of India.
Its First governor was Sir Osborne A.Smith
The First Indian Governor was Sir
Chintaman D.Deshmukh

MAIN FUNCTIONS

Roles of RBI
Development of banking system
Development of financial institutions
Development of backward areas
Economic stability
Economic growth
Proper interest rate structure

Credit creation

The most important function of the central bank is

to control credit by commercial banks.
Money and credit represent a powerful force for
good evil in the economy.
Money cannot manage itself. So it is the duty of the
central bank to ensure that money and credit is
properly managed so that inflation and deflationary
pressures can be controlled in the economy.
In modern times bank credit has become the
important source of money and commercial have
unlimited power to expand or contract credit.

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Methods

of credit control are broadly

divided into two:

Quantitative

credit control methods

Qualitative or selective credit control methods

FISCAL POLICY

Fiscal Policy is that part of Govt. policy which is

concerned with raising revenue through taxation and
other means and deciding on the level and pattern of
expenditure.

The Fiscal Policy operates through the budget.

Budget is an estimate of govt. expenditure and revenue

for the ensuing financial year.

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In

broad term fiscal policy refers to "that

segment of national economic policy which is
primarily concerned with the receipts and
expenditure of central government.

Main Objectives of Fiscal

Policy In India
Development

by effective Mobilization of Resources

Efficient allocation of Financial Resources
Reduction in inequalities of Income and Wealth
Price Stability and Control of Inflation
Employment Generation
Balanced Regional Development
Reducing the Deficit in the Balance of Payment
Increasing National Income
Foreign Exchange Earnings

Types of fiscal policy

Discretionary

Fiscal Policy

Expansionary

Fiscal Policy

Contractionary

Fiscal Policy

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Expansionary Fiscal Policy

Expansionary

fiscal policy uses increased

government spending, reduced taxes or a
combination of the two.
The chief objective of a fiscal expansion is to
increase aggregate demand for goods and
services across the economy, as well as to
reduce unemployment.

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Contractionary Fiscal Policy

When

government
policy-makers
cut
spending or increase taxes, they engage in
contractionary fiscal policy. Governments may
enact contractionary measures to slow an
economic expansion and prevent inflation..
In
addition, governments may enact
contractionary policy for ideological reasons.
These include reducing the overall size and
scope of government activity or lowering
budget deficits, in which the government
spends more money than it collects.

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Discretionaryfiscal policy
Discretionary

fiscal policy is the portion of the

Federal government's actions that can be
changed year to year by Congress and the
President. It is usually executed through each
year's budget or through changes in the tax
code.

Measures of fiscal policy

Fiscal

policy is the policy under which the

government of a country uses fiscal measures
(or instruments) to correct excess demand
and deficient demand and to achieve other
desirable objectives. There are mainly three
types of fiscal measures, viz.
A) Taxes
B) Public expenditure
C) public borrowing

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Taxes
Excess

of aggregate demand over aggregates

supply is caused due to the excess amount of
money income is the hands of the people in
relation to the available output in the country.
In order to correct such situation personal
disposable should be reduced. Therefore,
government should increase the rate of
personal income tax, and corporate income
tax so that people will have less money in their
hands and aggregates demand will fall.

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Public expenditure
Public

expenditure
is
an
important
component of aggregate demand. Therefore,
excess demand can be corrected by reducing
government expenditure.
On the other hand, government should
increase expenditure on public works
programmers.
Besides, government should also enhance
expenditure on social security measures, like
old age pensions, unemployment allowances,
sickness benefits etc.

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Public borrowing

Like tax and public expenditure, public borrowing

is also an important anti inflationary
instrument. Government of a country should
resort to borrowing from the non-bank public to
keep less money in their hands for correcting the
state of excess demand and inflationary situation.
On the other hand, to correct deficient demand,
government should reduce borrowing from the
general public so that purchasing power in the
hands of the people is not reduced

MONETARY POLICY

The Monetary and Credit Policy is the policy statement,

traditionally announced twice a year, through which
the Reserve Bank of India seeks to ensure price stability
for the economy.

This include - money supply, interest rates and the

inflation. In banking and economic terms money
supply is referred to as M1, M2, M3 and M4 - which
indicates the level (stock) of legal currency in the
economy.

Besides, the RBI also announces norms for the

banking and financial sector and the institutions which
are governed by it.

Measures of Money Stock

RBI employs 4 measures of money stock: M1:The measure of money stock designated
by M1 is usually described as the money
supply.
M2:M1+Post office Savings Bank Deposits.
M3:M1+Time Deposits with Banks.

M4:M3+total Post Office Deposits.

Objectives of Monetary
Policy

The objectives are to maintain price stability and ensure adequate

flow of credit to the productive sectors of the economy.

Stability for the national currency (after looking at prevailing

economic conditions)

growth in employment and income are also looked into.

The monetary policy affects the real sector through long and variable
periods while the financial markets are also impacted through shortterm implications.

Instruments of Monetary
Policy
Bank Rate of Interest
Cash Reserve Ratio
Statutory Liquidity Ratio
Open market Operations
Margin Requirements
Deficit Financing
Issue of New Currency
Credit Control

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Bank Rate of Interest

It is the interest rate which is fixed by the RBI to

control the lending capacity of Commercial banks.

During Inflation , RBI increases the bank rate of

interest due to which borrowing power of commercial
banks reduces which thereby reduces the supply of
money or credit in the economy.

When Money supply Reduces it reduces the

purchasing power and thereby curtailing Consumption
and lowering Prices.

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Cash Reserve Ratio

CRR, or cash reserve ratio, refers to a portion of

deposits (as cash) which banks have to
keep/maintain with the RBI.

During Inflation RBI increases the CRR due to

which commercial banks have to keep a greater
portion of their deposits with the RBI .

This serves two purposes. It ensures that a portion

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

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Statutory Liquidity Ratio

Banks are required to invest a portion of their

deposits in government securities as a part of their
statutory liquidity ratio (SLR) requirements .

If SLR increases the lending capacity of commercial

banks decreases thereby regulating the supply of
money in the economy.

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Open Market Operations

It refers to the buying and selling of Govt.

securities in the open market .

During inflation RBI sells securities in the open

market which leads to transfer of money to RBI.
Thus money supply is controlled in the economy.

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Deficit Financing

It means printing of new currency notes by Reserve

Bank of India .If more new notes are printed it will
increase the supply of money thereby increasing
demand and prices.

Thus during Inflation, RBI will stop printing new

currency notes thereby controlling inflation.

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Issue of New Currency
During

Inflation the RBI will issue new

currency notes replacing many old
notes.

This

will reduce the supply of money in

the economy.

Repo rate
Repo

rate is the interest rate at which the

central bank lends funds to banks against
pledging securities.
If the RBI wants to make it more expensive for
the banks to borrow money, it increases the
repo rate; similarly, if it wants to make it
cheaper for banks to borrow money, it reduces
the repo rate.

Reverse Repo rate

The

rate at which RBI borrows money from the

banks (or banks lend money to the RBI) is
termed the reverse repo rate.
If the reverse repo rate is increased, it means the
RBI will borrow money from the bank. This helps
stem the flow of excess money into the economy .
Reverse repo rate signifies the rate at which the
central bank absorbs liquidity from the banks,
while repo signifies the rate at which liquidity is
injected.

Prime lending rate

The

interest rate that commercial banks

charge their best, most credit-worthy
customers.
The rate tends to become standard across the
banking industry.
Many consumer loans, such as home equity,
automobile, mortgage, and credit card loans,
are tied to the prime rate.

Base Rate
rate
It

is the minimum rate of interest that a bank

is allowed to charge from its customers.
Unless mandated by the government, RBI rule
stipulates that no bank can offer loans at a
rate lower than BR to any of its customers.
Base Rate System is for the banks to set a level
of minimum interest rates charged while
giving out the loans.

Call rate
rate
It

is Short term Inter bank rate .Call rate is the

interest rate paid by the banks for lending and
borrowing for daily fund requirement.
Since banks need funds on a daily basis, they
lend to and borrow from other banks
according to their daily or short-term
requirements on a regular basis.

Credit control
The

main objective is to check speculation and

rising prices. The RBI issues directives to banks
relating to the purpose for which advances may
or may not be made.
The margins to be maintained in respect of
secured advances.
Credit Controls Specifies minimum margins for
lending against specific securities. Ceiling on amt
of credit for certain purposes to stem the flow of
credit to speculative and non productive sectors

Policy rates and reserve

ratios
Policy

rates, Reserve ratios,

Bankand
Rate deposit rates
8.50%(19/3/2013)
lending,
as of 19,
Rate
7.50%
March,Repo
2013
Reverse Repo Rate

6.50%

Cash Reserve Ratio (CRR)

4%

Statutory Liquidity Ratio (SLR)

23.0%

Base Rate

9.75%10.50%

Deposit Rate

8.50%9.00%

Inflation

4.25%

Difference Between Monetary

Policy & Fiscal Policy

The Fiscal policy decisions are set by the National Govt.

where as Monetary Policy is being implemented by the
central bank i.e. the RBI.

Fiscal policy deals in govt. spending and revenue

collection by the way of tax. Whereas Monetary Policy is
a process which controls the demand and supply of
money.

Fiscal policy relates to the economic position of a nation.

Monetary policy focuses on the strategy of banks.

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Fiscal

policy administers the taxation

structure of the nation. Monetary Policy
helps to stabilize the economy of the
country.

Fiscal

policy speaks of the governments

economic program. Monetary policy sets
the program of all commercial banks of the
nation.

THANK YOU