10 Questions
What is the bank rate provided by the RBI for loans to commercial banks?
6.75%
Which component is not maintained when CRR and SLR are not maintained?
Collateral
What is the purpose of the liquidity adjustment facility?
Repo and Reverse Repo operation
During inflation, what adjustments are made to CRR, SLR, BR, and RRR?
Increase in regulators
In the case of deflation, how does the RBI modify interest rates?
Decrease interest rates
What forms can the Statutory Liquid Ratio (SLR) reserve take?
Cash, Gold, G-Sec
Which of the following is a qualitative tool of monetary policy?
Rationing of credit
What does the Money Multiplier (MM) represent in monetary policy?
New money created by banks
Which component appears on the liability side of a commercial bank's balance sheet?
Initial money invested
Who are the members involved in the Monetary Policy Committee as per the Urjit Patel Committee recommendation?
RBI governor, Deputy governor, RBI and government members
Study Notes
Monetary Policy
- RBI provides loans to commercial banks without collateral at a bank rate of 6.75%.
- RBI buys or sells government securities for short-term liquidity management through Repurchase Agreements (Repo) and Reverse Repo.
- Repo rate is the rate at which RBI lends to banks, while Reverse Repo rate is the rate at which banks lend to RBI.
- These rates are part of the Liquidity Adjustment Facility (LAF).
- Banks can borrow up to 2% of their Net Demand and Time Liabilities (NDTL) from RBI overnight.
- Failure to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) results in penalties and loans.
- Banks can use their Statutory Liquidity Ratio (SLR) quota to pledge government securities as collateral.
- During inflation, RBI increases CRR, SLR, Bank Rate, and Repo Rate to reduce money supply and curb inflation.
- During deflation, RBI reduces these rates to increase money supply and stimulate growth.
Commercial Bank Balance Sheet
- A commercial bank's balance sheet consists of liabilities and assets.
- Liabilities include initial investments, borrowings from RBI, deposits (savings, current, fixed, recurring), and other liabilities.
- Assets include share capital, loans taken from RBI, vault cash, deposits with RBI, loans, and investments in government securities.
Fiscal Policy
- Fiscal policy is used by the Government of India to control inflation or deflation.
- Tools of fiscal policy include subsidies, Minimum Support Prices (MSP), and taxes, which affect disposable income.
Monetary Policy Tools
- Monetary policy tools are classified into quantitative and qualitative tools.
- Quantitative tools include Open Market Operations (OMO) and Marginal Standing Facility (MSF).
- Qualitative tools include Rationing of Credit, Regulation of Consumer Credit, and Moral Suasion.
- Rationing of Credit involves fixing credit limits for industrial, household, and other purposes.
- Regulation of Consumer Credit involves fixing installment amounts, down payments, and loan durations in advance.
- Moral Suasion involves imposing credit limits for each sector through rules and regulations.
- The Money Multiplier (MM) is the maximum amount of new money created by banks for every dollar of reserves, and it is inversely proportional to the Cash Reserve Ratio (CRR).
- In cases of inflation or deflation, RBI regulates money supply using monetary policy tools.
Net Demand and Time Liabilities (NDTL)
- NDTL is the total deposits held by a commercial bank.
- RBI keeps a part of NDTL as a reserve, which includes:
- Cash Reserve Ratio (CRR): a reserve in the form of cash, on which banks do not earn interest.
- Statutory Liquidity Ratio (SLR): a reserve in the form of cash, gold, and government securities, on which banks earn interest.
Test your understanding of monetary policy, including the ways RBI provides loans to commercial banks, the role of repo and reverse repo rates, and the limits of NDTL and CRR/SLR.
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