Indian Financial System

PROJECT
On

MONETARY
POLICY
Submitted to:
Submitted by:
Dr. Rajesh Jhamb
Jyoti Yadav
UM11105
B.E+M.B.A
(biotechnology)

OUTLINIE
Financial system (introduction)
Functions of system
RBI
Functions of RBI
Monetary policy
Credit control
Need of credit control
objective of credit control
Method of credit control
tools of credit control
Objective of Monetary policy
Instruments of Monetary policy
Current scenario
Conclusion

FUNCTIONS
ENCOURAGE SAVINGS:
official classification adopted by the Central Statistical
Organization (CSO), Government of India, reclassify savers
into
Household sector: comprise individuals, non-Government, noncorporate entities in agriculture, trade and industry, and non-profit
making organisations like trusts and charitable and religious
institutions.
Domestic private corporate sector:comprises non-government
public and private limited companies (whether financial or nonfinancial) and corrective institutions.
The public sector: comprises Central and state governments,
departmental and non departmental undertakings, the RBI, etc.
MOBILISATION OF SAVINGS:
ALLOCATION OF FUNDS:

RBI(RESERVE BANK OF INDIA)-THE

CENTRAL BANK
ESTABLISHMENT
established on April 1, 1935
in accordance with the provisions of theReserve Bank of India
Act, 1934.
The Central Office of the Reserve Bank was initially established
in Calcutta but was permanently moved to Mumbai in 1937.
since nationalisation in 1949, the Reserve Bank is fully owned by
the Government of India.
function under the guidance of the Board for Financial
Supervision (BFS).
MAIN FUNCTIONS
Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow
of credit to productive sectors.

which the country's banking and financial system functions.

Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services
to the public.
Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and
promote orderly development and maintenance of foreign
exchange market in India.
Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for
circulation.
Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.
Developmental role
Performs a wide range of promotional functions to support
national objectives.
Related Functions
Banker to the Government: performs merchant banking
function for the central and the state governments; also acts as
their banker.
Banker to banks: maintains banking accounts of all

MONETARY POLICY
refers to the credit control measures adopted by the central
bank of a country.
A policy employing central banks control of the supply of
money as an instrument for achieving the objectives of general
economic policy.

CREDIT CONTROL
tool used by Reserve Bank of India
a major weapon of the monetary policy used to control the
demand and supply of money (liquidity) in the economy.
used by RBI to bring Economic Development with
Stability.

NEED FOR CREDIT CONTROL

To encourage the overall growth of the priority sector i.e.
those sectors of the economy which is recognized by the
government as prioritized depending upon their economic
condition or government interest.
To keep a check over the channelization of credit so that credit is
not delivered for undesirable purposes.
To achieve the objective of controlling Inflation as well as
Deflation.
To boost the economy by facilitating the flow of adequate volume
of bank credit to different sectors.
To develop the economy.

OBJECTIVES OF CREDIT CONTROL

Ensure an adequate level of liquidity enough to attain high
economic growth rate along with maximum utilization of resource
but without generating high inflationary pressure.
Attain stability in exchange rate and money market of the
country.
Meeting the financial requirement during slump in the economy
and in the normal times as well.
Control business cycle and meet business needs.

METHODS OF CREDIT CONTROL

Qualitative Method
controls the manner of channelizing of cash and credit
in the economy.
selective method of control as it restricts credit for certain
section where as expands for the other known as the priority
sector depending on the situation.

Quantitative Method

control of the total quantity of credit.

For Example- let us consider that the Central Bank, on the
basis of its calculations, considers that Rs. 50,000 is the
maximum safe limit for the expansion of credit. But the actual
credit at that given point of time is Rs. 55,000(say). Thus it
then becomes necessary for the Central Bank to bring it down
to 50,000 by tightening its policies. Similarly if the actual
credit is less, say 45,000, then the apex bank regulates its

Tools used under QUALITATIVE

method
1) Marginal Requirement
Marginal Requirement of loan = current value of security offered
for loan-value of loans granted.
)e.g.- a person mortgages his property worth Rs. 1,00,000
against loan. The bank will give loan of Rs. 80,000 only. The
marginal requirement here is 20%.
) In case the flow of credit has to be increased, the
marginal requirement will be lowered.
)RBI has been using this method since 1956.
2) Rationing of credit
) maximum limit to loans and advances that can be made, which
the commercial banks cannot exceed.
) RBI fixes ceiling for specific categories.
) used for situations when credit flow is to be checked,
particularly for speculative activities.

3) Publicity
RBI uses media for the publicity of its views on the current
market condition and its directions.
not very successful in developing nations due to high illiteracy
existing making it difficult for people to understand such policies
and its implications.
4) Direct Action
authority to take strict action against any of the commercial
banks that refuses to obey the directions given by Reserve Bank
of India
5) Moral Suasion/ Moral Persuasion
persuading the commercial banks to follow its directions/orders
on the flow of credit.
RBI puts a pressure on the commercial banks to put a
ceiling on credit flow during inflation and be liberal in
lending during deflation.

Different tools used under

QUANTITATIVE method
1) Bank Rate/ Discount Rate
)official minimum rate at which the Central Bank
of the country is ready to rediscount approved bills
of exchange or lend on approved securities.
)This Rate is increased during the times of
inflation when the money supply in the
economy has to be controlled.

OBJECTIVES OR GOALS OF
MONETARY POLICY:
1) Full Employment
2) Price Stability
3) Economic Growth
4) Balance of Payments

INSTRUMENTS OF MONETARY
POLICY:
QUANTITATIVE, GENERAL OR INDIRECT:
includes bank rate variations, open market operations and
changing reserve requirements.
They are meant to regulate the overall level of credit in the
economy through commercial banks.
QUALITATIVE, SELECTIVE OR DIRECT:
The selective credit controls aim at controlling specific types of
credit.
They include changing margin requirements and regulation of
consumer credit.

Cash Reserve Ratio (CRR):

The share of net demand and time liabilities (deposits) that banks
must maintain as cash balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR):
The share of net demand and time liabilities (deposits) that banks
must maintain in safe and liquid assets, such as, government
securities, cash and gold.
Changes in SLR often influence the availability of resources in the
banking system for lending to the private sector.
Term Repos:
Since October 2013, the Reserve Bank has introduced term repos
(of different tenors, such as, 7/14/28 days),
to inject liquidity over a period that is longer than overnight.
The aim of term repo is to help develop inter-bank money market,
which in turn can set market based benchmarks for pricing of loans
and deposits, and through that improve transmission of monetary
policy.

Open Market Operations (OMOs):

These include both, outright purchase/sale of government securities
(for injection/absorption of liquidity)
Bank Rate:
It is the rate at which the Reserve Bank is ready to buy or rediscount
bills of exchange or other commercial papers.
Market Stabilisation Scheme (MSS):
This instrument for monetary management was introduced in 2004.
Surplus liquidity of a more enduring nature arising from large capital
inflows is absorbed through sale of short-dated government securities
and treasury bills.
The mobilised cash is held in a separate government account with the
Reserve Bank.
The instrument thus has features of both, SLR and CRR.

Cash Reserve Ratio

and Interest Rates
from 2013-2015

4.00

Aug.
29.22015
4.00

Aug.
28.2015
4.00

23.00

22.00

21.50

7.75
6.75

8.00
7.00

7.25
6.25

8.75

9.00

8.25

8.75
10.00/10.25

9.00
10.00/10.25

8.25
9.70/10.00

8.00/9.05

8.00/9.05

7.25/8.00

4.00

4.00

4.00

item

Aug.29.2013

Cash Reserve Ratio

Statutory Liquidity
Ratio
Policy Repo Rate
Reverse Repo Rate
Marginal Standing
Facility (MSF) Rate
Bank Rate
Base Rate
Term Deposit Rate >1
Year
Savings Deposit Rate

CONCLUSION
During the period of inflation Reserve Bank of India tightens
its policies to restrict the money supply
whereas during deflation it allows the commercial bank to
pump money in the economy.
The monetarists contend that as against fiscal policy, monetary
policy possesses greater flexibility and it can be implemented
rapidly.

Thankyou