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Monetary Policy 07.06.2007

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0% found this document useful (0 votes)
31 views19 pages

Monetary Policy 07.06.2007

Uploaded by

sunnyjainiitd
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Central

Banking
&
Monetary
10/29/24
Policy 1
Central Bank
 Central monetary institution
 Regulates currency and controls credit
 Performs duty of bankers’ & Govt’s bank
 Supervises banking system
 Manages and controls forex
 Custodian of cash reserves of Banks
 Regulation of financial system
10/29/24 2
History of Central Banking
 1656 – Riksbank, Sweden
 1800 – Bank of France
 1844 – Bank of England
 1875 – Reichsbank, Germany
 1934 – Bank of Canada
 1935 – RBI
 1940s – Central Banks in > 40
countries
10/29/24 3
Rationale of a Monetary
Authority
 Increased volume of banking business
 Priority sector lending to rural sector
 Linkage
effect of money circulation in the
economy
 Banking, credit extension to various
sectors and GDP growth

10/29/24 4
Branch Expansion of all Commercial
Banks
Number of Offices (as on June 30, 2005) % of Rural
Bank Group Branches
as on
1969 1999 2001 2003 2005
30.06.2005

Public Sector Banks 7,051 60,065 60,443 60,956 62,045 49.9

Other Indian 900 4,902 5,206 5,447 6,181 17.8


Scheduled
Commercial Banks

Foreign Banks 130 178 236 214 251 -

Source: Economic Survey, Ministry of Finance, Government of India, 2005-06


10/29/24 5
Deposits and Credit of all Scheduled Commercial
Bank
(in Rs. Cr.)
Year Bank deposits Bank credit Credit to % credit to
agriculture and agriculture and
allied activities allied activities to
total bank credit
1950-51 820 580 - -
1970-71 5,910 4,690 818 17.4
1990-91 1,92,540 1,16,300 10,188 8.7
2000-01 9,62,620 5,11,430 52,827 10.3
2002-03 12,80,580 7,25,370 69,560 9.5
2003-04 15,73,341 8,96,213 86,981 9.7
2004-05 17,90,564 11,02,354 1,15,243 10.4
2005-06 18,53,486 11,86,012 1,17,899 9.9
Source: 1. Reserve Bank of India
2. Ministry of Finance, Government of India
10/29/24 6
RBI
 April 1, 1935 under RBI Act 1934.
 22 regional offices mostly in state
capitals
 Preamble (objective): "…to regulate
the issue of Bank Notes and keeping of
reserves with a view to securing
monetary stability in India and generally
to operate the currency and credit
system of the country to its advantage.“
10/29/24 7
Money Market and Central
 Main Players:
Bank
 RBI
 Banks
 NBFIs
 Mutual Funds
 PSUs
 NRIs and Corporate Bodies
 Average Turnover >Rs. 40,000 cr. daily
 Maintenance of liquidity and short-term interest rates at levels
consistent with the monetary policy objectives of price stability.
 Adequate flow of credit to the productive sectors of the
economy
 Energize forex market and bring order in case of any
inconsistency
10/29/24 8
Monetary Policy in India

 Objectives of Monetary Policy


 Features of the policy
 Monetary Policy Operations
 Policy Challenges

10/29/24 9
Objectives of Monetary Policy
 Price Stability – Low and stable order of inflation
 Investment – adequate credit flow to productive
sectors
 Exchange rate stability
 Promotion of efficient payment system
 Regulatingand developing financial markets
and maintaining stability
 Savings, Investment, Employment and growth
10/29/24 10
Features
 Announced Twice by RBI
 April -- Annual Policy
 October -- Mid-Term Review
 Structure of Monetary Policy
Announcements:
 Review of macro-economic and monetary
developments
 Stance on monetary policy
 Policy measures (monetary, money market,
prudential, forex market etc.)
10/29/24 11
Monetary Achievements &
Targets (in per cent)

Achieved* Projected**
Indicators
2006-07 2005-06 2006-07

Real GDP 8.9 8.5 8.0


growth
Inflation 5.5 4.1 5.0 to 5.5
M3 growth 19.0 16.8 > 18.0
* till October month of respective years;
** for the whole financial year
10/29/24 12

Source: RBI
Monetary Policy Stance
 Containing inflation and achieving desired real GDP
growth in the evolving global and domestic situation
 Provision of appropriate liquidity to meet credit
growth
 Loans (ST) from RBI is discouraged
 Loan destinations to be monitored (whether productive or
not)
 Banks to re-look their retail loan policy for real estates
 support investment and export demand
 pursuing an interest rate environment conducive to
macroeconomic and price stability, and maintaining
the momentum of growth,
 considering measures to stabilize inflationary
13
10/29/24

expectations.
Monetary Policy Operations…
 Instruments
Direct
CRR – Primary reserve requirements in the form
of cash with RBI (5.0%)
SLR – Secondary reserve requirements in the
form of banks holding government and other
specified securities (25%)
Selective
Moral suation: Friendly pursuation
Directed credit for Priority sectors etc.
10/29/24 14
Monetary Policy Operations…
 Indirect instruments
 Interest
rates – bank rate at which bills are
discounted with RBI (6%)
 Standing facility to banks as export credit
refinance
 Repo(transactions where participant acquires
immediate funds by selling secs. and agrees to
repurchase the same after a specified time)
and reverse repos
 Open
10/29/24 market operations 15
Monetary Policy Operations…
 Shift in use of policy 1992-2006
 Narasimham Committee 1991 & 1998
 Shift from direct to indirect instruments
 Phasing out selective credit controls
 Combining LAF (Liquidy Adjustment Facility) by Repos
and Reverse Repos in injecting or absorbing liquidity
with Open Market Operations (dated secs. and T-bills)
 Interest
rate deregulation (IBA asked to review
Benchmarked PLR)
 Prudential and capital adequacy norms prescribed
 Freedom
10/29/24 of operation ensured 16
Reserves and Rates
 Required Reserves and Excess Reserves
 CRR -- cash reserve of bank’s net demand and
time liabilities -- 3 to 15% (now 5%)
 SLR -- designated liquid assets with Govt.
 Determined by (1) excess reserves or cash-in-hand,
(2) unencumbered government and other approved
securities (3) current account balances with other
banks.
 Range 25 to 40% (now 25%)
(1) + (2) + (3)
 SLR = -----------------------------------------------
10/29/24
Total time and demand liabilities 17
Business Cycle and Monetary
Policy
 Inflation
Dearmoney policy
Check M3 growth
Market intervention through Repo and
OMO
Upward movement in reserve rates

 Depression
Cheap money policy
10/29/24 18
Monetary Policy -
Challenges
 Maintenance of financial stability
 Better linkages needed between money market, govt.
sec. market and forex markets.
 Management of capital flows (FIIs)
 Management of Inflation (hike in crude POL)
 Capital adequacy norms (provisions for bad and
doubtful debts) and prudential norms (management
of NPAs) for Banks
 Implementation of Basel-II norms of Capital
Adequacy
 Bank exposure to capital market and related
regulations
10/29/24 19

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