RBI MONETARY POLICY

RBI MONETARY POLICY

      The Reserve Bank's Monetary Policy Department formulates monetary policy.

Broad Objective Of Monetary Policy:

1)Price Stability

2)Ensuring adequate flow of credit to productive sectors.

3)Financial stability

Specific Objectives Of Monetary Policy:

1)Mobilization of the savings and promote capital formation

2) Maintain High GDP Growth

3)High Export Growth Rate

4)Higher Employment Generation Rate

5)Economic Stability

Tools under Monetary Policy:

1)Direct Instruments

a) Cash Reserve Ratio

     The share of net demand and time liabilities maintained as a cash balance with RBI by  all scheduled commercial banks

(Excluding Regional Rural Banks and Local

Area Banks).

     Previously there was a floor of 3 and  ceiling of 20 percent that could be imposed by RBI.            

     RBI raised maximum level of CRR on the date  01/07/1989, 04/05/1991, 11/01/1992, 21/04/1992, 08/10/1992. 

      And first time it was decreased to below 5% level i.e.4.75% on 16/11/2002.

     At present CRR rate is 3%. 

     Since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of india.

     At present RBI does not pay any interest on the CRR deposits.

2)Statutory Liquidity Ratio(SLR): 

     The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold.

     It was raised to the  maximum level at 38.5% on date 22/09/1990 and 29/02/1992.

     The maximum limit of SLR is 40% and the minimum limit of SLR is 0 in India.

      The present SLR rate is 18.50%.

3. Export Credit Refinance Facility:

     The Reserve Bank of India (RBI) provides export credit refinance facility to banks under Section 17(3A) of the Reserve Bank of India Act 1934, in order to encourage banks to extend more liberal export credit. The quantum of refinance is fixed from time to time based on the stance of monetary and credit policy of the RBI.

      All scheduled banks (excluding RRBs), which are authorised dealers in foreign exchange and have extended export credit are eligible to avail of the export credit refinance facility.Export credit refinance facility is available at the Repo Rate (which is linked to Reverse Repo Rate under the Liquidity Adjustment Facility (LAF), as announced from time to time.

      RBI extends the export credit refinance against the Demand Promissory Note (DPN) of banks.  

       The minimum amount of availment under this facility is Rupees one lakh and multiples thereof.

     The refinance has to be repaid on demand or within 180 days.

Indirect instruments:

1) Liquidity Adjustment Facility (LAF):

     Consist of daily infusion or obsorption of liquidity on a repurchase basis, through repo(liquidity injection) and reverse repo(liquidity absorption) auction operations, using government securities as collateral. These rates under LAF determine the corridor for short-term money market interest rates. 

      Present repo rate is 4% and reverse repo is 3.35%.

2)Open market operations (OMO):

        Outright sales/purchase of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

3)Market Stabilization Scheme(MSS):

      The instrument for monetary policy management was introduced in 2004.              

      Liquidity of more enduring nature arising from large capital flows is observed through sale of short- dated government securities and treasury bills. The mobilised cash is held in a separate government account with the RBI.

Bank rate:

     It is the rate at which the RBI is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.  

     The present bank rate is 4.65. 

Important things to remember:

      The scheduled commercial banks are those banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services.

      Scheduled banks are usually nationalised banks, private banks and foreign banks operating in India. 

      All Commercial Banks (including Regional Rural Banks),

Local Area Banks, Small Finance Banks, Payments Banks,

Primary (Urban) Co-operative Banks (UCBs),

 Central Co-operative Banks and State Co-operative banks are examples of the scheduled banks.

       

        Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks. Unlike scheduled banks, they are not entitled to borrow from the RBI for normal banking purposes, except, in emergency or “abnormal circumstances." Some co-operative and local area banks are the examples of non schedule commercial banks.

      RBI monitors over the following indicators:

Interest rates,Inflation rate, money supply, Credit, exchange rate, trade, capital flows and fiscal position.

By....

S.M.Rachawad

At post Nanded.