Monetary Policy
Monetary policy is the process by which the government, central bank, or monetary authority manages the supply of money in the economy of the country.
Aim of the monetary policy is either to increase the total supply of money in the economy by lowering interest rates or to decrease the supply by increasing the interest rates.
What are the objectives of Indian Monetary policy?
· Maintain price stability
· flow of credit to the productive sectors of the economy
· stability for the national currency
· Growth in employment and income.
Tools of Indian Monetary Policy
· Open Market Operations (OMO)
· Cash Reserve Ratio (CRR)
· REPO/Reverse Repo
· Statutory Liquidity Ratio (SLR)
Open market operations
Sales or purchases of government debt instruments (treasury bonds, treasury bills, treasury notes) on the open financial markets by a country's central bank as part of its efforts to influence the size of the money supply and the levels of interest rates.
Central bank decisions to buy up government debt instruments make for an expansionary (increase) monetary policy, while sales of government debt instruments by the central bank represent a contractionary (tightening) monetary policy.
Different Policy Rates:
Repo-Bank Rate is the rate at which banks borrow money from the RBI, When Repo-Bank Rate is increased money supply in the economy decreases. It is 7.75% as of today in India.
Reverse-repo rate is the rate at which the RBI absorbs liquidity from the system, or the interest rate paid to banks for RBI's borrowings from them. It is 6% as of today in India.
Bank-Discount Rate is the Rate at which Banks borrow money from the Central Bank (RBI). It is 6% as of today in India.
Reserve Ratios:
CRR – Cash Reserve Ratio, the portion or percentage of Depositor’s balances banks must have on hand as cash. It is a requirement determined by country’s Central Bank. It Affects money supply in a country.
for e.g.: if CRR in India is set at 7.5% (this is current CRR rate in India) and Banks total deposits are in tune of Rs 100 Cr then Rs 7 Cr is required to be kept as reserve.
SLR – Statutory Liquidity Ratio is that amount which a bank has to maintain in the form of cash, gold or approved securities. The ratio is derived broadly on the total demand and time liabilities of a bank. It is 25% as of today in India.
Lending/Deposit Rates:
Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers. It is 12.75 to 13.25 % as of today in India.
Savings Bank Rate – is the interest rate offered by banks for the money kept in Savings account. It is 3.5% as of today in India.
Deposit Rate – is the rate interest rate offered by banks for short-long term deposits with the banks. It is 7.5 to 9.6 % depending on tenure as of today in India.
Capital Markets:
BSE Sensex
S&P CNX Nifty
Government Securities Market:
T Bills (91/182/364 Days) : T-Bills are treasury bills issued by the government of a country and are exchangeable (redeemable) in less than a year.
Money Markets:
Call Rates – is the overnight inter-bank interest rate. It is 6.65 to 8.05% as of today in India.
LIABILITIES for a Bank
1. Capital
2. Reserves & Surplus
3. Deposits
3.1 Demand Deposits
3.2 Savings Bank Deposits
3.3 Term Deposits
4. Borrowings
5. Other Liabilities and Provisions
ASSETS of a Bank
1. Cash & balances with RBI
2. Balances with banks and money at call & short notice
3. Investments
3.1 Govt. Securities
3a. In India
3b. Outside India
3.2 In other approved securities
3.3 In non-approved securities
4. LOANS & ADVANCES
4.1 Bills purchased & discounted
4.2 Cash credit, Overdrafts etc.
4.3 Term loans
5. Fixed Assets
6. Other assets
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