Monetary Policy 07.06.2007
Monetary Policy 07.06.2007
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
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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
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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
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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
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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
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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.)
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Monetary Achievements &
Targets (in per cent)
Achieved* Projected**
Indicators
2006-07 2005-06 2006-07
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
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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.
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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
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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
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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 = -----------------------------------------------
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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
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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
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