Banking Awareness 33: RBIs Monetary Policy.

Are you willing to know the detailed information about the RBIs Monetary Policy? Here is the article which provides you the clean and clear information about the RBIs Monetary Policy. Hope you all have an idea about monetary policy that Monetary policy is the macroeconomic policy laid down by the central bank. It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity.

Monetary policy refers to all those operations, which are used to control the money supply in the economy. The overall objective of the Monetary policy is to:-

  • To maintain economic and financial stability.
  • To ensure adequate financial resources for the purpose of development.

These objectives can be further simplified to:

  1. Maintaining price stability.
  2. Adequate flow of credit to productive sectors.
  3. Promotion of productive investments & trade.
  4. Promotion of exports and economic growth.

RBI announces Monetary policy every year in the month of April. This is followed by three quarterly reviews in July, October, and January.

Various Tools/ Instruments of Monetary policy:-

Various instruments of monetary policy can be divided into quantitative instruments. Quantitative Instruments are those which directly affect the quantity of money supply in the economy. Quantitative instruments are those which impact the money supply indirectly.

 The Quantitative Instruments are:-

  • Open Market Operations.
  • Liquidity Adjustment Facility.
  • Marginal Standing Facility.
  • SLR, CRR.
  • Bank Rate.
  • Credit ceiling, etc.

on the other hand, quantitative instruments are Credit rationing, moral suasion, and direct action.

Open Market Operations:-

It refers to the purchase and sale of the Government securities by RBI Form/ to the market. The objective of OMO is to adjust the rupee liquidity conditions in the economy on a durable basis. The working of OMO is defined below:-

  • When RBI sells government security in the markets, the banks purchase them. When the bank's purchase Government Securities, they have reduced the ability to lend to the industrial houses or other Commercial sectors.
  •  When RBI purchases the securities, the commercial banks find them with more surplus cash and this would create more credit in the systems.

Liquidity Adjustment Facility:-

It is one of the primary instrument of RBI for modulating liquidity and transmitting interest rate signals to the market. LAF was introduced in June 2000. It refers to the difference between the two keys rate such as repo rate and reverses repo rate. These are done by actions so-called "repo actions" (or) "reverse repo actions". Other Important points are as follows:-

  • The repo and reverse repo rates are decided by RBI on its own discretion.
  • Only Government of India is added Securities/ Treasury bills are used for collateral under LAF as of now.
  • While repo injects liquidity into the systems, the reverse repo absorbs the liquidity from the system.
  • RBI only announces Repo rate. The Reverse Repo rate is linked to Repo Rate and is 100 basis points below the repo rate. RBI makes decisions regarding the repo rate on the basis of prevailing market conditions and relevant factors.
  • RBI conducts the Repo auctions and Reverse Repo auctions on daily basis from Monday to Friday except for holidays.
  • All the Scheduled Commercial Banks are eligible to participate in auctions except the Regional Rural Banks.
  • Primary dealers having current accounts and SGL Account with reserve bank are also eligible to participate in the repo and reverse rep actions.
  • Under the Liquidity Adjustment Facility, bids need to be for a minimum amount of Rs.5 crore and in multiples of Rs. 5 Crore thereafter.

Marginal Standing Facility:-

Marginal Standing Facility is a new Liquidity Adjustment Facility window which is created by RBI in its credit policy of May 2011.

  1. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.

Statutory Liquidity Ratio:-

The banks and other Financial institutions in India have to keep a fraction of their total net time and demand liabilities in the form of liquid assets such as G-secs, Precious metals, other approved securities, etc. this fraction is called as Statutory Liquidity Ratio.

It is one of the two statutory pre-emptions because it gets its legal sanction from section 24 of Banking Regulation Act 1949, which is initially mandated for a 23% SLR. To comply with the SLR, the banks can keep any of the following.

  • Cash in Hands.
  • Gold owned by the bank.
  • Balance with RBI.
  • Netbalance in the current account.
  • Investment in Government securities.

 

 

 

 

 

 

 

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