Monetary Policy Lecture 3 PDF

LECTURE – 3 VIVEK PANDEY JOIN – GAGS CONCEPT  ECONOMY BUDGET MONETARY POLICY 1 YEAR = 1 TIMES 1YEAR = 6 TIMES VIVEK PANDEY JOIN – GAGS CONCEPT VIVEK PANDEY JOIN – GAGS CONCEPT...

LECTURE – 3 VIVEK PANDEY JOIN – GAGS CONCEPT  ECONOMY BUDGET MONETARY POLICY 1 YEAR = 1 TIMES 1YEAR = 6 TIMES VIVEK PANDEY JOIN – GAGS CONCEPT VIVEK PANDEY JOIN – GAGS CONCEPT VIVEK PANDEY JOIN – GAGS CONCEPT  MONETARY POLICY Monetary Policy is the Component of Economic Policy through Which Central Bank regulates Money Supply in an Economy. मौद्रिक नीद्रि वह प्रद्रिया है द्रिसके साथ द्रकसी दे श का मौद्रिक प्राद्रिकरण, अथथव्यवस्था में िन की आपूद्रिथ को द्रनयंद्रिि करिा है । Objectives of Monetary Policy Price Stability Exchange Rate Stability Inflation Targeting Economic Growth Financial Stability VIVEK PANDEY JOIN – GAGS CONCEPT  Reforms in Monetary Policy In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. मई 2016 में, लचीले मुद्रास्फीति लक्ष्यीकरण ढाां चे के कार्ाा न्वर्न के तलए एक वैधातनक आधार प्रदान करने के तलए आरबीआई अतधतनर्म, 1934 में सांशोधन तकर्ा गर्ा था। Inflation target- Under section 45ZA, the Central Government, in consultation with the RBI, sets an inflation target. मुद्रास्फीति लक्ष्य- धारा 45जेडए के िहि, केंद्र सरकार, आरबीआई के परामशा से , मुद्रास्फीति लक्ष्य तनधाा ररि करिी है । Inflation-targeting means controlling prices or maintaining price stability. मुद्रास्फीति-लक्ष्यीकरण का अथा है कीमिोां को तनर्ांतिि करना र्ा मूल्य स्थथरिा बनाए रखना। VIVEK PANDEY JOIN – GAGS CONCEPT  Reforms in Monetary Policy The inflation target will be set by the Government of India in consultation with the RBI once every five years. मुद्रास्फीति का लक्ष्य हर पाां च साल में एक बार आरबीआई के परामशा से भारि सरकार द्वारा तनधाा ररि तकर्ा जाएगा। The inflation target of monetary policy is 4% consumer price index with an upper tolerance limit of 6% and a lower tolerance limit of 2%. मौतद्रक नीति का मुद्रास्फीति लक्ष्य 4% उपभोक्ता मूल्य सूचकाां क है तजसमें ऊपरी सहनशीलिा सीमा 6% और तनचली सहनशीलिा सीमा 2% है । VIVEK PANDEY JOIN – GAGS CONCEPT  Monetary Policy Committee  Section 45ZB of the amended RBI Act, 1934 provides powers for a six-member Monetary Policy Committee (MPC) to be constituted by the Central Government by notification in the Official Gazette.  The first such MPC was constituted on September 29, 2016.  The MPC is required to meet at least four times in a year. The quorum for an MPC meeting is four members.  Each member of the MPC has one vote, and in the event of a tie, the Governor has a second or casting vote. VIVEK PANDEY JOIN – GAGS CONCEPT  Monetary Policy Committee (MPC) Chairperson (Governor of the Reserve Shri Shaktikanta Das Bank of India) In-charge of Monetary Policy Dr. Michael Debabrata Patra Member 4(ED) Rajiv Ranjan Ram Singh, director, Delhi School of Member 2 Economics Member 3 Saugata Bhattacharya, economist Nagesh Kumar, director and chief executive, Institute Member 1 for Studies in Industrial Development, New Delhi. VIVEK PANDEY JOIN – GAGS CONCEPT  Tools of Monetary Policy Direct Tools Indirect Tools Bank Rate Repo Rate Cash Reserve Ratio Reverse Repo Rate Marginal Standing Facility SDF Statutory liquidity Base Rate( Its decided by bank) / MCLR Ratio OMO MSS VIVEK PANDEY JOIN – GAGS CONCEPT  Current Rates https://www.rbi.org.in RESERVE Policy Rates RATE BANK RATE 6.75 % CRR 4.50 % REPO RATE 6.50 % Reverse Repo 3.35 % SLR 18 % Rate MSF 6.75 % Standing 6.25 % Deposit Facility Rate VIVEK PANDEY JOIN – GAGS CONCEPT  Cash Reserve Ratio (CRR) Percentage of bank deposits which the bank has to keep with RBI. It is applicable on all Schedule commercial banks. It is mentioned in RBI Act 1934 section 42 (1). No interest is paid on its by RBI. It has no minimum and maximum limits. Maintained - 1- Daily basis & Branch wise. 2- Non Refundable. VIVEK PANDEY JOIN – GAGS CONCEPT  Statutory Liquidity Ratio (SLR) Percentage of bank deposits which the bank has to keep with itself in 3 forms. 1- Cash 2- Gold 3 -Government securities It is applicable on all Schedule commercial banks & FI. It is mentioned in Banking Regulation Act 1949 section 24. It has no minimum limit and maximum limit is 40 %. VIVEK PANDEY JOIN – GAGS CONCEPT  Statutory Liquidity Ratio Objectives of SLR 1.To ensure that bank should maintain sufficient cash with themselves. VIVEK PANDEY JOIN – GAGS CONCEPT  CRR AND SLR CRR+ SLR When CRR Rate is 4 % and SLR Rate 18% Rs 100 Deposit Rs. 78 Balance SLR in 3 forms. 1 – CASH 2 – GOLD Distribute as Individual /Corporate Loan 3 – G-SEC. VIVEK PANDEY JOIN – GAGS CONCEPT  Indirect Tools VIVEK PANDEY JOIN – GAGS CONCEPT  Bank Rate It is the rate of interest at which commercials banks borrowed money from RBI for long term purpose. Features - 1- Long term (Above 90 days ) 2-Only CBs used this service 3- Collateral free 4- The Bank Rate is under Section 49 of the R.B.I. ACT 1934 VIVEK PANDEY JOIN – GAGS CONCEPT  Liquidity Adjustment Facility (LAF) Definition LAF is a tool used in monetary It allows banks to policy that allows banks to borrow money through respond to liquidity repurchase rate. pressure. Repo and Reverse Repo Rate is done under LAF VIVEK PANDEY JOIN – GAGS CONCEPT  LAF KNOWN AS LAF CORRIDOOR REVERSE REPO REPO RATE RATE VIVEK PANDEY JOIN – GAGS CONCEPT  REPO RATE 1- Short term (up to 90 days ) Repo rate ,or repurchase rate , 2-All RBI clients.(CBs, State government , is the rate at which RBI lends to NBFC etc.) banks for short period. 3-Collateral securities must required. This is done by RBI buying government bonds from banks 4- Minimum Amt. – 5cr. with an agreement to sell them back at a fixed rate. 5- Maximum Amt. – No Limit Note- Bank never use SLR quota securities for Repo rate. VIVEK PANDEY JOIN – GAGS CONCEPT  REPO RATE Government security move to Liquidity move to Few Days later Liquidity move to Government security move to VIVEK PANDEY JOIN – GAGS CONCEPT  EMI - Equated Monthly Installment VIVEK PANDEY JOIN – GAGS CONCEPT  Reverse Repo Rate. It is the rate of interest at which commercial banks deposits their excess of money to RBI. To control the liquidity in the economy. Reverse repo Transaction Government security move to Liquidity move to VIVEK PANDEY JOIN – GAGS CONCEPT  Reverse Repo Rate. VIVEK PANDEY JOIN – GAGS CONCEPT  Effects of Repo & Reverse Repo Rate When Repo and reverse Repo increases, Money Supply in the market decreases. when Repo and reverses Repo decreases Money Supply in the market increases. VIVEK PANDEY JOIN – GAGS CONCEPT  VARIABLE REVERSE REPO RATE आरबीआई चाहिा है तक अथाव्यवथथा से िरलिा को तनचोडा जाए, लेतकन बैंक आरबीआई द्वारा तनधाा ररि दर पर आरबीआई के पास पैसा जमा करने के तलए उत्सुक नहीां हैं , क्ोांतक ऐसा हो सकिा है तक बाजार में ब्याज दर आरबीआई द्वारा तनधाा ररि ररवसा रे पो दर से अतधक हो। Variable reverse repo rate: RBI wants to squeeze out liquidity from the economy but banks are not keen to deposit money with RBI at the rate fixed by RBI, as it may happen that the interest rate in the market is higher than the reverse repo rate fixed by RBI. आरबीआई पररविानीर् ररवसा रे पो दर का साधन लेकर आर्ा है , जहाां ब्याज दर आरबीआई द्वारा नहीां बस्ि नीलामी के माध्यम से बाजार द्वारा िर् की जािी है । RBI has come up with the instrument of variable reverse repo rate, where the interest rate is not decided by RBI but by the market through auction. VIVEK PANDEY JOIN – GAGS CONCEPT  Marginal Standing Facility (9 May 2011) MSF IS A FACILITY UNDER Its an Emergency window for commercial banks. WHICH SCHEDULED COMMERCIAL BANKS Only CBs used this service. BORROW FOR With collateral securities OVERNIGHT FROM RBI 1 AGAINST THEIR Only for one day or over night. SECURITIES PRIMARILY SLR , WHEN LIQUIDITY OF Min – 5cr. THE BANKS DRIES UP Max- 2 % of NDTL. COMPLETELY. VIVEK PANDEY JOIN – GAGS CONCEPT  Standing Deposit Facility (SDF) In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity without any collateral. The Standing Deposit Facility (SDF) is a collateral free arrangement meaning that RBI need not give collateral for liquidity absorption. The SDF will allow the RBI to suck out liquidity without offering government securities as collateral. VIVEK PANDEY JOIN – GAGS CONCEPT  Standing Deposit Facility (SDF)  Importance of the SDF is that it is designed to enable the Reserve Bank to deal with extraordinary situations in which it has to absorb massive amounts of liquidity. In the past situations like global financial crisis and demonetization caused liquidity absorption problems for the RBI. VIVEK PANDEY JOIN – GAGS CONCEPT  Base Rate - 2010 Base Rate Repo Rate It's decided by Bank. BASE RATE – ( Deepak Mohanty) Benchmark Prime  Brought 2010 Lending rate --  It is the rate of interest below which bank cannot granting loans.  Some exempted categories.  Brought in 2003 1- Bank Employee.  Not found Transparent  Replaced by base Rate. 2-Central government plans. 3-Prime customer. VIVEK PANDEY JOIN – GAGS CONCEPT  Marginal Cost of funds based Lending Rate. Marginal Cost of funds based Lending Rate. Marginal costs i.e. latest cost condition will reflect in the interest rates. Deposit costs and repo rate will reflect in MCLR. It results in quick transmission of policy rates i.e., when RBI reduces Repo Rate it will reflect in MCLR. Applicable form 1ST April 2016. VIVEK PANDEY JOIN – GAGS CONCEPT  Open Market Operation SELL/PUR G-SEC. Purchasing and selling of government securities. VIVEK PANDEY JOIN – GAGS CONCEPT  Open Market Operation Open Market Operation is a monetary policy tool of the RBI. Open Market Operations refers to buying and selling of eligible securities or first-class bills (govt. securities) by the RBI. Securities sold and purchased are government securities including bonds and treasury bills. Buying securities in the increases the supply of money. Selling of securities reduces the volume of money with the public. To reduce the inflationary pressure, the RBI may sell securities in the open market. VIVEK PANDEY JOIN – GAGS CONCEPT  Market Stabilisation Scheme -2004 SELL / PURCHASE GOVERNMENT SECURTIES MSS Account to be maintained and operated by the RBI. MSS Was introduced in April ,2004 This is used to control the excess liquidity from abroad. VIVEK PANDEY JOIN – GAGS CONCEPT VIVEK PANDEY JOIN – GAGS CONCEPT