Assignment on "Monetary Policy of RBI's

Comparison With Fed Bank of England , ECB"

(MANAGEMENT OF FINANCIAL INSTITUTION)

SCHOOL OF MANAGEMENT STUDIES

SUBMITTED TO: Dr. Parneet Kaur SUBMITTED BY: Sanjana Chhabra

ROLL NUMBER: 19421198

MBA-II(3rd Sem)
 What is Monetary policy?
Monetary policy, the demand side of economic policy, refers to the
actions undertaken by a nation's central bank to control money
supply to achieve macroeconomic goals that promote sustainable
economic growth.

KEY TAKEAWAYS

 Monetary policy, the demand side of economic policy, refers

to the actions undertaken by a nation's central bank to control
money supply to achieve macroeconomic goals that promote
sustainable economic growth.

 Monetary policy can be broadly classified as either

expansionary or contractionary.

 Monetary policy tools include open market operations, direct

lending to banks, bank reserve requirements, unconventional
emergency lending programs, and managing market
expectations (subject to the central bank's credibility).

Tools to Implement Monetary Policy

Central banks use a number of tools to shape and implement monetary

policy. 

1. First is the buying and selling of short term bonds on the open
market using newly created bank reserves. This is known as open
 market operations. Open market operations traditionally target short
term interest rates such as the federal funds rate. The central bank
adds money into the banking system by buying assets (or removes in
by selling assets), and banks respond by loaning the money more
easily at lower rates (or more dearly, at higher rates), until the
central bank's interest rate target is met. Open market operations
can also target specific increases in the money supply in order to get
the banks to loan funds more easily, by purchasing a specified
quantity of assets in a process known as quantitative easing.

2. The second option used by monetary authorities is to change the

interest rates and/or the required collateral that the central bank
demands for emergency direct loans to banks in its role as lender-of-
last-resort. In the U.S. this rate is known as the discount rate.
Charging higher rates and requiring more collateral, will mean that
banks have to be more cautious with their own lending or risk failure
and is an example of contractionary monetary policy. Conversely,
lending to banks at lower rates and at looser collateral requirements
will enable banks to make riskier loans at lower rates and run with
lower reserves, and is expansionary.

3. Authorities also use a third option, the reserve requirements, which

refer to the funds that banks must retain as a proportion of the
deposits made by their customers in order to ensure that they are
able to meet their liabilities. Lowering this reserve requirement
releases more capital for the banks to offer loans or to buy other
 assets. Increasing the reserve requirement has a reverse effect,
curtailing bank lending and slowing growth of the money supply.

4. In addition to the standard expansionary and contractionary

monetary policies, unconventional monetary policy has also gained
tremendous popularity in recent times. During periods of extreme
economic crisis, like the financial crisis of 2008, the U.S. Fed loaded
its balance sheet with trillions of dollars in treasury
notes and mortgage-backed securities by introducing news lending
and asset purchase programs that combined aspects of discount
lending, open market operations, and quantitative easing. 2 Monetary
authorities of other leading economies across the globe followed
suit, with the Bank of England, the European Central Bank and
the Bank of Japan pursuing similar policies.

5. Lastly, in addition to direct influence over the money supply and

bank lending environment, central banks have a powerful tool in
their ability to shape market expectations by their public
announcements about the central bank's own future policies. Central
banks statements and policy announcements move markets, and
investors who guess right about what the central banks will do can
profit handsomely. Some central bankers choose to be deliberately
opaque to market participants in the belief that this will maximize
the effectiveness of monetary policy shifts by making them
unpredictable and not "baked-in" to market prices in advance.
Others choose the opposite course of action by being more open and
 predictable in the hopes that they can shape and stabilize market
expectations in order to curb volatile market swings that can result
from unexpected policy shifts.

However, the policy announcements are effective only to the extent of

the credibility of the authority which is responsible for drafting,
announcing, and implementing the necessary measures. In an ideal
world, such monetary authorities should work completely independent
of influence from the government, political pressure, or any other
policy-making authorities. In reality, governments across the globe may
have varying levels of interference with the monetary authority’s
working. It may vary from the government, judiciary, or political parties
having a role limited to only appointing the key members of the
authority, or may extend to forcing them to announce populist
measures (to influence an approaching election for example). If a central
bank announces a particular policy to put curbs on increasing inflation,
the inflation may continue to remain high if common public have no or
little trust in the authority. While making investment decisions based on
the announced monetary policy, one should also consider the credibility
of the authority.

Comparing RBI’s monetary policy with Fed, Bank of England and ECB..

It compares the operating framework of monetary policy of three top

central banks with RBI.  We usually look at monetary policy as a policy
which changes rates to manage inflation. That is surely the purpose but
mechanics of implementing the policy differ vastly across central banks.
This mechanics is called the operating framework which includes liquidity
facilities, bank reserves, ways to change policy rates etc.  

This is an excellent table to showing differences in three major central

banks with RBI:

Table: Key Features of Major Central Banks Operating Procedures

Features Federal ECB BOE RBI
Reserve
Policy rate Federal fund Main refinancing Bank rate Repo rate
target rate operations rate
Target rate Federal funds EONIA (Euro Overnight market Weighted
overnight index interest rate average
average) call rate
Reserve 0 to 10 % of 2% on deposits Optional with 6% of net
requirements transactions with terms less individual bank demand
accounts, 0 than 2 years, 0 on setting its own and time
for non- longer term target. liabilities
transactions deposits of banks
accounts
Definition of Balances at Balances at the Balances at the Balances
reserve the Fed + ECB, excluding BoE at the RBI
vault cash deposited funds
Reserve Two weeks One month 4-5weeks Two
maintenance weeks
period
Reserve Lagged two Lagged one month Reserve target set Lagged
accounting weeks at least 2 days two
ahead of reserve weeks
maintenance
period
Standing Lending (as of Both lending and Both lending and Both
facilities Jan 2003) deposit facilities deposit facilities Lending
Interest on (MSF and
reserves (as of ECR) and
Oct. 2008) deposit
facility
(collatera
lized
reverse
repo)
Open market Daily, at Weekly, at the Weekly and once Daily LAF
operations market rate higher of the main in a maintenance auction
refinancing rate or period at the at fixed
the market rate Bank rate. rate.
Long-
term
operation
s as and
when
required
at market
rate
MSF= Marginal Standing Facility; and ECR = Export Credit Refinance (available at repo
rate up to 15 per cent of outstanding export credit); LAF= Liquidity Adjustment
Facility.
* Since March 2009, BOE has suspended the reserve averaging regime and short-term
open market operations on account of its asset purchases through creation of central
bank reserves (known as quantitative easing).

Above table shows the difference in Reserve bank of India with

Federal Reserve bank of US, European central bank and Bank of
England . How's the monetary policy is different aspect of rates.