We are very much thankful to those people from whom we have got help during the preparation of this

presentation. We wish to express our gratitude to Ms. Shagun Arora of NIS Academy under whose advice and guidance we have completed this presentation.

This presentation is prepared by the full cooperation of our team members with team spirit

 The part of the economic policy which regulates the level of money in the economy in order to regulate inflation, improve balance of payments, increase gross national product etc. RBI, in case of India controls the monetary policy. The policy statement traditionally announced twice a year through which RBI insures Price stability for the economy.
April-September - Slack Season Policy October-March - Busy Season Policy

RBI reserves its right to alter monetary policy to time to time depending upon state of economy

Maintain price stability Flow of credit to the productive sector of economy Stability of national currency Growth in employment & income Achieving foreign exchange stability Managing suitable level of investment and savings Regulating rate of interest & induce higher level of investment Achieving monetary equilibrium to ensure equality between demand & supply of money.

MONETARY

POLICY QUALITATIVE
CONTROL

QUANTITATIVE
CONTROL

Bank Rate-The rate at which RBI extends credit to comm. Banks . CRR-The percentage of banks deposits which they must keep as cash with RBI. SLR-A comm. Bank has to keep a portion of total deposits with itself in liquid assets. Open Market Operations
LAF Repo & reverse Repo MSS Market stabilization scheme

Selective quality control Rationing of credit. Margin requirement Variable interest rate Regulation of consumer credit Licensing to ensure proper regional coverage They can be negative in character intended to discourage activities which are regarded as inessential or undesirable.

 SLR should not be used for directed investment in PSUs. It should be lower down to minimum limit of 25% CRR should be lower than the present rate. As an instrument it should be used less & Govt. should depend upon OMOs. Selective credit control should be slowly phased out Prime lending rate of commercial bank should be independent of RBI control

 Banks use this rate to price their Long term loans to individual and companies Increase in Bank rate Increase in lending rate of Commercial Banks Decline in aggregate money expenditure lowering inflation and vice versa. This tool now not much in use and remains same since years .

Bank Rate

In 1940s BR was at low 3% and remained unchanged till 1953.In 1953 RBI adopted policy controlled expansion BR raised to 3.5%.It reached at max. level in 1991 12%. Presently it is 6%

RBI has the power to vary this ratio and there by use it as an instrument of Credit Control. Permissible limit is 3 to 15%(1962) It is essential for a bank to maintain the ratio or otherwise it may not be able to meet the withdrawal demand of all its depositors, and failure to do so may eventually result in failure of the bank. Increase in CRR reduce the excess reserves available to a bank for lending contracting Credit Increase in CRR absorbs Foreign Capital Inflows checking rupees appreciation.

 In beginning it was 5% of demand deposit & 2% of time deposits Reached max. in 1991,92 after 1993 it followed Narsimham report & decreased. But from dec.06 it raised 7 times, 250bp to cool credit growth & supply.

 Statutory Liquidity Ratio Narsimham committee recommended to reduced it at minimum level. According to that it is 25%and remains unchanged. Khan committee suggested abolishment of SLR.
The buying & selling of these securities laid the foundation of the 1992 Harshad Mehta scam.

It was 25% in 1949 after that it increased continuously 32%(1972)--- 35% (1981)---36%(1984)--38%(1988). From 1997 it is constant at 25%

 Open Market Operations-these refer to the sale and purchase of Govt. securities by the RBI The main objective of these operations has been to stabilizes the prices of Govt. securities. The control of inflationary pressures has, however been the secondary objectives. It is used several times after 1991 for controlling inflows.

 Repo Rate
This is the rate at which the central bank adds funds to the monetary market. Present rate 7.75%

Reverse Repo Rate

The rate at which the central bank borrows funds from the market. It impacts Govt. bond yields and short term bank deposits. Present rate 6%

 Govt. agenda and development plans Recommendation of Narshimham committee,Tarapore committee and Khan committee report. Inflation and price situation. Credit and liquidity condition. Foreign money inflow (specially USD) IMF and World bank.

 The RBI is likely to keep its Monetary policy tight in view of the uncertainties in global financial markets and high prices of crude oil and food items.
The US Fed Reserves rate cuts put pressure on RBI to lower rates. The immediate pressure would come from the FOREX market with bankers expecting the rupees to firm up against the USD.

 RBI in extraordinary condition devaluated Rupees 3 times in past . In Sep.1949-30.5%.(Due to Shadow of Colonial system and aim of overall growth). In June 1966-36.5%(Due to crop failure and Indo-pak.war). In 1991-20% in 3 phase (Due to economic stagnation and failure of PSUs). After 1992-93 Rupees headed towards full convertibility. Now value of Rupees almost depends upon free market forces of demand &supply.

Interest Rate
1990 1994 1995-97 2003
Bank were advised to announce a benchmark PLR All sector-specific The minimum rate The ceiling on Interest rate prescriptions prescription withdrawn. rate on deposits Were abolished Bank free to charge were removed PLR

2008 Bank are advised to be Proactive in credit scenario 1.Economy opens in 1990 and reforms start. 2.Narsimham committee for autonomy in banking sector. 3.Second generation reforms from 2001. 4.Banks have to compete with multinational banks in 21st century.

Inflation & price control It is characterized by increase in quantity of money in proportion to buying power. According to Castle and Keynes domestic price stability should be main objective of central banks monetary policy. RBI declared its policy endeavour would be to keep inflation close to 5%. For controlling inflation RBI adopted cheap or dear credit policy and selective credit control.

On Foreign Exchange
RBI has to maintain equilibrium rate of exchange because any change in rate will have repercussion on BOP of India. RBI generally uses CRR and Repo rates for checking inflow or outflow foreign currency From 2000 control of RBI on foreign exchange become less under FEMA act. 2001 onwards exchange rate is decided by market forces and RBI only monitor the process.