Professional Documents
Culture Documents
Budget Speech
Economic Survey
Newspaper
Source of preparation
1.NCERT 11, 12
2.Lecture + Mrunal.org
3.Budget +Survey
4. Hindu/IndianExpress
(10 Questions in CSAT-14)
Todays topic:
Banking Monetary Policy
1. Quantitative |
Qualitative tools
2. CRR, SLR, OMO
3. Repo, Reverse Repo,
4. MSF, LAF,
5. Reforms
Before money was invented
Double
Coincidence
Of wants
2 kg 500 gms
Birth & Evolution of money
Supply Demand
1 kg = Rs.100
Supply Demand
Inflation
Demand Demand
1 kg =
Rs.1000
Supply
Demand Demand
Inflation: supply
Demand Demand
1 kg =
Rs.100
Supply
Demand Demand
Reduce demand by money supply
Demand Demand
1 kg =
Rs.100
Supply
Demand Demand
Combat Inflation Deflation Combat
Depositors Borrowers
CRR: 04%
SLR: 21.5%
Total: 25.5%
Liabilities of a Bank
Demand
Liabilities
Time
Liabilities
Reserve ratio counted on NDTL
Demand Liabilities Time liabilities
Deposited
+120 Cr.
Took out
20 Cr.
CRR SLR
4% 21.5%
Cash, Gold
Cant lend RBI approved
No profit securities
Cash Reserve Ratio (CRR)
Deposit Examples All Banks
Time Deposit FDRD Penalty
Demand CASA No profit. Except 1999.
Deposit Right now 4%
NDTL +100 cr. IIM-A Prof D'Souza
report: allow gold-forex
investment
Reserve ratio
RBI said No, due to
CRR (-) 4% volatility
[no profit]
Statutory Liquidity Ratio
Deposit Examples All banks
Time Deposit FDRD In Cash, gold, RBI
Demand Deposit CASA approved securities
Net Demand and Time +100 cr.
Liabilities (NDTL) Some profit.
Right now 21.5%
Reserve
Fortnight Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
21.5 cr. SLR
Reserve Ratios
1.What is NDTL?
2.What are SLR and CRR?
3.How to use them against inflation & deflation
Cyclic fluctuation: Inflation
CRR, SLR: 0%
Loan: 10%
10% of 2 crore
=20 lakh rupees
To combat inflation:
REDUCE Money supply
Cyclic fluctuation: Inflation
To combat inflation:
REDUCE Money supply
Hike in Bank Loan Interest Rates
10%
20%
50,000/-
48,000/-
Hike in Bank Loan Interest Rates
10%
20%
Inflation Deflation
RBI CRR/SLR RBI CRR/SLR
Banks left with less Banks are left with more
money to lend money
interest rates to keep They interest rates to
Profit margin same
get new clients
People borrow
People borrow
demand
Prices Demand
= Inflation controlled = Price
Monetary Policy: Quantitative Tools: Reserve Ratios
Inflation fight
HOW? Tight | Dear
CRR, SLR
Monetary Policy: Quantitative Tools: Reserve Ratios
SLR
RBI
Reduced SLR
To flow money in
Productive
Promised fiscal sectors of
Economy
consolidation
Both counted on NDTL Have to set aside this much
cash in reserve.
TIME(FDRD) Demand (CASA) Profit? NO!
Depositors Borrowers
Idle money
=LOSS MAKING
Must invest
G-Sec: 8%
Liquidity / money supply
d d
Quant. Tool Inflation fight
Tight/dear
CRR, SLR
OMO Sell
To fight inflation,
Ive to money supply
from the system
Quant. Tool Inflation fight Deflation fight
Tight/dear Easy/ Cheap
CRR, SLR
OMO Sell Buy
MCQ (UPSC-2013)
In context of Indian Economy, Open Market
Operation refers to
A. Borrowing by scheduled banks from RBI
B. Lending by commercial banks to industries and
trade
C. Purchase and sale of government securities by
the RBI
D. None of Above
Interest
rate: 9%
BANK RATE
Collateral: Nothing
Bank Rate 3% Loans 5%
Bank Rate 36% Loans 48%
Less demand
Inflation controlled
Monetary Policy
Quant. Tool Inflation fight Deflation fight
CRR, SLR
OMO Sell Buy
Bank
RATE
Bank Rate: WHY?
Not the main tool to control money
supply these days.
Bank rate is Linked with penal rates:
If CRR, SLR not maintained:
Penalty= (Bank rate + 3%); 5%
CRR, SLR Fortnight lag
Fortnight Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
21.5 cr. SLR
Otherwise penalty
Bank Rate + 3%
Bank Rate + 5%
Have to set aside this much
Long term loan from cash in reserve.
RBI without collateral No Profit
LAF NDTL
Banks have to keep this much in cash,
gold, G-sec & other RBI approved
securities. Some profit
LAF: Liquidity Adjustment Facility (2000)
Collateral? = Government security.
LAF Short term loans.
Repo When clients borrow from
RBI. 8%
Reverse When clients deposit money
Repo in RBI. 8-1=7%
Repo Rate: Meaning?
Repo Rate 8%
100 crore
SBI to Repurchase
@108 Cr.
After 7 days Collateral: G-Sec
But not from SLR
Bank cant use these
G-sec to borrow
under Repo
Whats the difference?
LAF (Repo) MSF
Minimum 5 cr 1 cr.
All clients eligible Only scheduled
1. Central & State commercial banks can bid.
Government Paid up cap. 5l, protect
2. All Banks interest of depositors=>
RBI Act 1934, 2nd Sch.
3. NBFI (LIC, UTI)
LAF (Repo) MSF
100 crore
RBI to Repurchase
@107 Cr.
After 7 days Collateral: G-Sec
But not from SLR
Reverse Repo
Reverse repo rate = it is interest rate paid
by RBI to its clients for short term loans.
Central & State Government, All Banks,
NBFI
Collateral: government securities
2011: RR = Repo 1% (100 basis points).
Dec 2014: Repo = 8%.
Reverse repo =8-1=7%
Repo
(R%)
POLICY RATE
1%= 100 basis points
8%- decreased by 25 basis points
8.00-0.25=7.75 (15/Jan/15)
During inflation
1,00,000
During inflation: Tight money policy
CPI
WPI
Bi- Bank MSF RR
2014 Repo SLR CRR
monthly Rate +1 -1
first April 9 9 8 7 23 4
second June 9 9 8 7 22.5 4
third August 9 9 8 7 22 4
fourth Sept,30 9 9 8 7 22 4
Fifth Dec, 2 9 9 8 7 22 4
Surprize 15/1/15 8.75 8.75 7.75 6.75 22 4
Sixth 3-Feb-15 8.75 8.75 7.75 6.75 21.5 4
Bi- Bank MSF RR
2015 Repo SLR CRR
monthly Rate +1 -1
Third Aug 8.25 8.25 7.25 6.25 21.5 4
RBI should decrease policy 1. Banks not passing
rate to boost Growth 2. Must check inflation
All clients can borrow short term loans Have to set aside this
Long term loan from from RBI @this interest rate. cant use SLR
securities though!
much cash in reserve
RBI =no income
Nachiket Mor
RBI board of directors.
Financial products for small businessmen and low income household.
Financial inclusion: banking, credit, investment, insurance. + consumer protection
Urjit Patel
Dy. Governor
Revise and Strengthen Monetary policy framework
Urjit Patel
Expert Committee to Revise and
Strengthen the Monetary Policy Monetary
Framework Policy
January 2014 report: Reforms
Three Major Recommendation:
1. RBI inflation targets (2-6%)
2. Government help RBI
3. RBI fix accountability
Until Now Urjit Patel
Bi-monthly RR
Policy
2014 MSF Repo CPI target
Repo
first April 9 8 7 started
second June 9 8 7
third August 9 8 7
fourth Sept,30 9 8 7
Monetary policy under Rajan
Challenges:
CPI
January 60% El Nino
Target
Geopolitical problems
2015 8% Subsidies
2016 6%
Repo Rate
CPI
WPI
Urjit Patel
1. RBI target inflation with deadline
2. Government should help RBI Monetary
3. RBIs accountability has to be Policy
fixed
Urjit Patel
MNREGA: wage yes.
Productive growthno? Government to
Subsidy leakage, corruption help RBI
Administered pricex
Fiscal consolidation
Monetary Policy: accountability in India
RBI Act.
Governor directly accountable to Government
Govt. can issue directives to RBI in public
interest.
Parliaments standing Committee on finance-
can summon Governor Avg. 3-4/year.
Monetary policy made by Governor alone. (sign.)
OVERALL No formal accountability mechanism.
Urjit: Monetary Policy: accountability in India
Target: 4% (2% band)= 2-6% .
Failure?? Three quarters successively.
MPC issue public statement
1. Each member will sign it
2. Reasons for failure
3. Action proposed
4. Time-frame for result.
Each cluster Existing dept will be grouped into FIVE
clusters
headed by COO Monetary
Dy.Gov. rank policy
Need Govt. Services Regulatory
approval
Financial Supervision
market
Self Study
NCERT Class12: Macroeconomics
Chapter 3 Money and banking
Monetary Policy
Ignore complicated graphs-
formula-equations
WPI, CPI, IIP,
inflation=>L5/P5.pptx
Next
Qualitative tools
Banking sector evolution since British India
Financial inclusion: PM-JDY, KVP etc.