Monetary policy Banking terms, methods, schemes
Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy About By RBI (Reserve bank of india)
Goals To maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. MONEY FLOW DEMAND
The Monetary Policy Process . Monetary Policy Committee (MPC) Assist MPD MPC Monetary Policy Department (MPD) The Financial Market Committee (FMC) Meets daily to review the liquidity conditions
Monetary policy Committee One officer of the RBI to be nominated by the Central Board #3 Economist from different stakeholders Deputy Governor Of RBI Chairperson, ex officio The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target.
Under the amended RBI Act, the monetary olicy making is as under: The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members. Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
MPR Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report. A. sources of B. Forecast of inflation for 6-18 months ahead inflation
Instruments of Monetary Policy Repo rate Reverse repo Liquidity Adjustment facility Marginal standing facility Bank rate Cash reserve ratio Statutory liquidity ratio Open market operations . Market stabilisation schemes
The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF). Repo Rate
The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF Reverse Repo RATE
Liquidity Adjustment Facility (LAF) 4. Whreb nturn can set market 1. 2. 3. Consists of overnight as well as term repo auctions BOTH REPO & REVERSE REPO FUNCTIONS Develop the inter-bank term money market based benchmarks for pricing of loans and deposits
Marginal Standing Facility (MSF) Scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system. 1% of NDTL( NET DEMAND & TIME LIABILITIES) . REPO MSF
Cash Reserve Ratio (CRR) The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India. CRR TOTAL money
Open Market Operations (OMO) These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively
Reserve CRR 4% SLR 23.5% 100% 9.5 4 + 19.5 23.5% 76.5% only bank can use for bussiness 76.5
Since 1935 By RBl Act, 1934 (as a private bank with 2 extra functions) Regulation and Control of the bank RBI in india Banker of government After Nationalisation in 1949 body of India It emerged as Central banking
FUNCTIONS Issuing agency of Currency and Coins (other than 1 rupee currency & coin because is issue by Ministry of Finance) Distributing agent Banker of government Bank of the Banks / Bank of last resort. Announces the credit & monetary policy Stabilising the rate of inflation Stabilising the exchange rate of rupee Keeper of foreign currency reserves Agent of GOl in IMF . . . . . .
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