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Reserve Bank of India and Monetary Policy.pptx

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Raghvendra Hajagolkar
Raghvendra Hajagolkar

RBI Functions and Objectives and Monetary Policy

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RESERVE BANK OF INDIA AND ITS MONETARY POLICY Dr. RAGHAVENDRA HAJGOLKAR Assistant Professor Department of PG Studies in Economics KLEs Lingaraj College, Belagavi
INTRODUCTION Reserve Bank of India (RBI) is the central bank of India entrusted with a multidimensional role which includes implementation of monetary policy and maintaining monetary stability in the country. RBI was established on 1st April 1935 under the Reserve Bank of India Act, 1934. RBI was set up after the recommendations of Hilton young Commission which had submitted its report in the year 1926. Later on, in 1931 the Indian Central banking enquiry committee had also recommended for the establishment of the central bank in India. Initially, Reserve Bank of India was established as a private shareholders bank, but it was nationalised after independence in the year 1949 through the Reserve Bank Act, 1948.
ORGANISATIONAL AND MANAGEMENT STRUCTURE OF RESERVE BANK OF INDIA The supervision and general affairs of RBI are governed by the central board of directors. The Government of India appoints the central board of directors for a tenure of 4 years. The Central Board of directors consists of full-time officials which include the Governor and not more than four Deputy Governors. The government nominates ten directors from different fields and two government officials. Other four directors one each from the local boards are also appointed. The current Reserve Bank of India governor is Shri. Shaktikanta Das. The current 4 Deputy Governors are Shri M. K. Jain, Shri M. Rajeshwar Rao, Dr. M. D. Patra, and Shri T. Rabi Shankar. The Deputy Governor and director attend the meetings of the Central Board, however, they are not entitled to vote.
FUNCTIONS OF RESERVE BANK OF INDIA
1. ISSUE OF BANK NOTES: The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited legal tender throughout the country. This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith of the public in the paper currency.
2. BANKER TO GOVERNMENT: As banker to the government the Reserve Bank manages the banking needs of the government. It has to-maintain and operate the governments deposit accounts. It collects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank. 3. CUSTODIAN OF CASH RESERVES : The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks.
4. CUSTODIAN OF COUNTRYS FOREIGN CURRENCY RESERVES: The Reserve Bank has the custody of the countrys reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position. 5. LENDER OF LAST RESORT: The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
6. CENTRAL CLEARANCE AND ACCOUNTS SETTLEMENT: Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank. 7. CONTROLLER OF CREDIT: Since credit money forms the most important part of supply of money, and since the supply of money has important implications for economic stability, the importance of control of credit becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government.
MONETARY POLICY OF RESERVE BANK OF INDIA Dr. RAGHAVENDRA HAJGOLKAR Assistant Professor Department of PG Studies in Economics KLEs Lingaraj College, Belagavi
MEANING OF MONETARY POLICY Monetary policy refers to the credit control measures adopted by the central bank of a country. Johnson defines monetary policy as policy employing central banks control of the supply of money as an instrument for achieving the objectives of general economic policy. G.K. Shaw defines it as any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money.
1. Full Employment: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because of unemployment leads to wastage of potential output, but also because of the loss of social standing and self- respect. 2. Price Stability: One of the policy objectives of monetary policy is to stabilise the price level. Both economists and laymen favour this policy because fluctuations in prices bring uncertainty and instability to the economy. OBJECTIVES OR GOALS OF MONETARY POLICY
3. Economic Growth: One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as the process whereby the real per capita income of a country increases over a long period of time. 4. Balance of Payments: Another objective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.
5. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If the exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. 6. Neutrality of Money: Economist such as Wicksted, Robertson has always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money.
INSTRUMENTS OF MONETARY POLICY The instruments of monetary policy are of two types: first, quantitative, general or indirect; and second, qualitative, selective or direct. They affect the level of aggregate demand through the supply of money, cost of money and availability of credit. Of the two types of instruments, the first category 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. The selective credit controls aim at controlling specific types of credit. They include changing margin requirements and regulation of consumer credit.
1. Rationing of credit 2. Margin requirements 3. Publicity 4. Regulation of Consumer Credit 5. Moral Suasion 6. Direct Action 1. Bank Rate 2. Open Market Operation 3. Variations in Reserve Requirement 4. Repo Rate and Reserve Repo Rate 5. Liquidity Adjustments Facility INSTRUMENTS OF MONETARY POLICY Quantitative Qualitative
QUANTITATIVE INSTRUMENTS Bank Rate: The bank rate, also known as the Discount Rate, is the oldest instrument of monetary policy. Bank rate is the rate at which the RBI discounts or, more accurely. (4.25%) Open market Operations: open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities or other financial instrument. Variations in the Reserve Requirement: The reserve bank also uses the method of variable reserve requirements to control credit in India. By changing the ratio, The reserve bank seeks to influence the credit creation power of the commercial banks.
Repo Rate and Reserve Repo Rate whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which banks borrow rupees from RBI. Current repo rate is 4% as on June 2021. Liquidity Adjustments Facility: It is a cool, used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.
QUALITATIVE INSTRUMENTS Rationing of credit: Credit rationing is a method of controlling and regulating the purpose for which credit is granted by commercial bank. It aims to limit the total amount of loans and advances granted by commercial banks. Margin Requirements: Margin is the difference b/w the market value of a security and its maximum loan value. Marginal requirement of loan can be increased or decreased to control the flow of chart. Publicity: RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control the unrest.
Regulation of Consumer Credit: If there is excess demand for certain consumer durable leading to their high prices, central bank can reduce consumer credit by increasing down payment, and reducing the number of installments of repayment of such credit. Moral Suasion: Moral Suasion means persuasion and request. To arrest inflationary situation central bank persuades and request the commercial banks to refrain from giving loans for speculative and non-essential purposes. Direct Action: Under the banking Regulation Act, the Central Bank has the authority to take strict action against any of the commercial bank that refuses to obey the directions given by Reserve Bank of India.
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Reserve Bank of India and Monetary Policy.pptx

  • 1. RESERVE BANK OF INDIA AND ITS MONETARY POLICY Dr. RAGHAVENDRA HAJGOLKAR Assistant Professor Department of PG Studies in Economics KLEs Lingaraj College, Belagavi
  • 2. INTRODUCTION Reserve Bank of India (RBI) is the central bank of India entrusted with a multidimensional role which includes implementation of monetary policy and maintaining monetary stability in the country. RBI was established on 1st April 1935 under the Reserve Bank of India Act, 1934. RBI was set up after the recommendations of Hilton young Commission which had submitted its report in the year 1926. Later on, in 1931 the Indian Central banking enquiry committee had also recommended for the establishment of the central bank in India. Initially, Reserve Bank of India was established as a private shareholders bank, but it was nationalised after independence in the year 1949 through the Reserve Bank Act, 1948.
  • 3. ORGANISATIONAL AND MANAGEMENT STRUCTURE OF RESERVE BANK OF INDIA The supervision and general affairs of RBI are governed by the central board of directors. The Government of India appoints the central board of directors for a tenure of 4 years. The Central Board of directors consists of full-time officials which include the Governor and not more than four Deputy Governors. The government nominates ten directors from different fields and two government officials. Other four directors one each from the local boards are also appointed. The current Reserve Bank of India governor is Shri. Shaktikanta Das. The current 4 Deputy Governors are Shri M. K. Jain, Shri M. Rajeshwar Rao, Dr. M. D. Patra, and Shri T. Rabi Shankar. The Deputy Governor and director attend the meetings of the Central Board, however, they are not entitled to vote.
  • 5. 1. ISSUE OF BANK NOTES: The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited legal tender throughout the country. This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith of the public in the paper currency.
  • 6. 2. BANKER TO GOVERNMENT: As banker to the government the Reserve Bank manages the banking needs of the government. It has to-maintain and operate the governments deposit accounts. It collects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank. 3. CUSTODIAN OF CASH RESERVES : The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks.
  • 7. 4. CUSTODIAN OF COUNTRYS FOREIGN CURRENCY RESERVES: The Reserve Bank has the custody of the countrys reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position. 5. LENDER OF LAST RESORT: The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
  • 8. 6. CENTRAL CLEARANCE AND ACCOUNTS SETTLEMENT: Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank. 7. CONTROLLER OF CREDIT: Since credit money forms the most important part of supply of money, and since the supply of money has important implications for economic stability, the importance of control of credit becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government.
  • 9. MONETARY POLICY OF RESERVE BANK OF INDIA Dr. RAGHAVENDRA HAJGOLKAR Assistant Professor Department of PG Studies in Economics KLEs Lingaraj College, Belagavi
  • 10. MEANING OF MONETARY POLICY Monetary policy refers to the credit control measures adopted by the central bank of a country. Johnson defines monetary policy as policy employing central banks control of the supply of money as an instrument for achieving the objectives of general economic policy. G.K. Shaw defines it as any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money.
  • 11. 1. Full Employment: Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because of unemployment leads to wastage of potential output, but also because of the loss of social standing and self- respect. 2. Price Stability: One of the policy objectives of monetary policy is to stabilise the price level. Both economists and laymen favour this policy because fluctuations in prices bring uncertainty and instability to the economy. OBJECTIVES OR GOALS OF MONETARY POLICY
  • 12. 3. Economic Growth: One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as the process whereby the real per capita income of a country increases over a long period of time. 4. Balance of Payments: Another objective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.
  • 13. 5. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If the exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. 6. Neutrality of Money: Economist such as Wicksted, Robertson has always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money.
  • 14. INSTRUMENTS OF MONETARY POLICY The instruments of monetary policy are of two types: first, quantitative, general or indirect; and second, qualitative, selective or direct. They affect the level of aggregate demand through the supply of money, cost of money and availability of credit. Of the two types of instruments, the first category 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. The selective credit controls aim at controlling specific types of credit. They include changing margin requirements and regulation of consumer credit.
  • 15. 1. Rationing of credit 2. Margin requirements 3. Publicity 4. Regulation of Consumer Credit 5. Moral Suasion 6. Direct Action 1. Bank Rate 2. Open Market Operation 3. Variations in Reserve Requirement 4. Repo Rate and Reserve Repo Rate 5. Liquidity Adjustments Facility INSTRUMENTS OF MONETARY POLICY Quantitative Qualitative
  • 16. QUANTITATIVE INSTRUMENTS Bank Rate: The bank rate, also known as the Discount Rate, is the oldest instrument of monetary policy. Bank rate is the rate at which the RBI discounts or, more accurely. (4.25%) Open market Operations: open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities or other financial instrument. Variations in the Reserve Requirement: The reserve bank also uses the method of variable reserve requirements to control credit in India. By changing the ratio, The reserve bank seeks to influence the credit creation power of the commercial banks.
  • 17. Repo Rate and Reserve Repo Rate whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which banks borrow rupees from RBI. Current repo rate is 4% as on June 2021. Liquidity Adjustments Facility: It is a cool, used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.
  • 18. QUALITATIVE INSTRUMENTS Rationing of credit: Credit rationing is a method of controlling and regulating the purpose for which credit is granted by commercial bank. It aims to limit the total amount of loans and advances granted by commercial banks. Margin Requirements: Margin is the difference b/w the market value of a security and its maximum loan value. Marginal requirement of loan can be increased or decreased to control the flow of chart. Publicity: RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control the unrest.
  • 19. Regulation of Consumer Credit: If there is excess demand for certain consumer durable leading to their high prices, central bank can reduce consumer credit by increasing down payment, and reducing the number of installments of repayment of such credit. Moral Suasion: Moral Suasion means persuasion and request. To arrest inflationary situation central bank persuades and request the commercial banks to refrain from giving loans for speculative and non-essential purposes. Direct Action: Under the banking Regulation Act, the Central Bank has the authority to take strict action against any of the commercial bank that refuses to obey the directions given by Reserve Bank of India.