Notes On

Monetary and Credit Policy of RBI, Liquidity Adjustment Facility, Repo Rate, Reverse Repo Rate, CRR, SLR , Mar inal Standin Facility ! Ban" Rate
Monetary ! Credit Policy of RBI# Monetary o$jective is to ac%ieve price sta$ility $y controllin supply of money in t%e economy& Credit o$jective is to ensure adequate supply of credit to reali'e t%e tar eted ro(t%& RBI)s main concerns are price sta$ility, financial sta$ility ! ensurin ro(t%&

*%e credit operations in t%e $an"in system are uided $y directives issued $y RBI from time to time& RBI e+presses its vie(s on economy t%rou % c%an es in monetary policy ,called Annual Policy Statement- in t%e mont% of April eac% year for t%e entire financial year and vie(s it every mid.quarterly& For policy purpose, t%e period April to Septem$er is "no(n as Slac" Season and t%e /cto$er to Marc% is called Busy Season& *%e policy normally aims fine 0 tunin t%e availa$ility and t%e cost of credit to productive sectors and to ensure non.inflationary ro(t%& *%ere are four policy rates ! t(o reserve ratios decided ! declared $y RBI in t%eir eac% mid.quarterly Monetary ! Credit Policy& RBI may c%an e t%ese rates1ratios ot%er(ise t%an policy declarations dependin on certain economic situations& *%e policy rates are ,2- Repo Rate ,3Reverse Repo Rate ,4- Mar inal Standin Facility ! ,5- Ban" Rate& *%e Reserve Ratios are ,2Cas% Reserve Ratio ,CRR- ! ,3- Statutory Liquidity Ratio ,SLR-& & Liquidity Adjustment Facility ,LAFIntroduced $y RBI durin 6une 3777& Last revised (&e&f& 38&27&3775& /$jective# . *%e funds are used $y t%e $an"s for t%eir day.to.day mis.matc%es in liquidity& Repo Rate# . RBI lends money ,for injection of liquidity- to $an"s& A cut in t%e repo rate is ood for $an"s& Present Repo Rate is 9&9:&; & RBI %ad increased repo rate t%irteen times since Marc% 27, 3727 to 3:&27& 3722& to contain inflation&

/n 79&27 3724, RBI declared t%at it (ould provide $an"s additional liquidity t%rou % term repos of 9.day and 25.day tenor for up to a fourt% of t%e $an"in system deposits ! t%rou % /pen Mar"et /perations& & & Reverse Repo Rate# . RBI $orro(in rate from Ban"s& It a$sor$s liquidity& Increase in reverse repo rate is positive for $an"s as $an"s earn more& Present reverse repo rate is <&:7 ;,(&e&f& 37&78&&3724*enor# . Repo ! Reverse Repo auctions are conducted under LAF (indo( on daily $asis e+cept Saturdays& =li i$ility# . All commercial $an"s ,e+cept Re ional Rural Ban"s 0 RRBs- and Primary >ealers ,P>s- %avin current account and S?L account (it% RBI& Minimum $id si'e# . Rs&: crores ,multiples of Rs&: Crore&=li i$le Securities# . Repos and Reverse Repos in transfera$le Central ?ovt& dated securities and treasury $ills& RBI stipulated t%at (&e&f 29&79&3724, overall allocation of funds under LAF (ill $e limited to 2; of @et >emand and *ime Lia$ilities ,@>*L- of t%e $an"in system, rec"oned as Rs& 9:,777 crore for t%is purpose& PR=S=@* reverse Repo Rate is <&9:;& Impact of c%an es in Repo ! Reverse Repo Rates $y RBI A c%an e in policy rates is an indicator of (%ic% (ay are t%e $an"s lendin and $orro(in rates %eaded& It also %as an indirect impact on customers $ecause $an"s decide t%e lendin rates ,to t%eir customers- $ased on RBIs lendin and $orro(in rates& Ban"s c%an e t%eir Prime Lendin Rate ,Benc%mar" Prime Lendin Rate 0 BPLR for old $orro(ers- and $ase rate ,for ne( $orro(ers&

Mar inal Standin Facility ,MSF*o mop up liquidity, RBI introduced MSF in annual credit policy 3722.23 ,effective from 28&:&3722- to re ulate s%ort term Asset Lia$ility Mana ement ,ALM- effectively& MSF ena$les $an"s to $orro( funds from RBI 2; a$ove t%e LAF.repo rate a ainst pled in ilts& Ban"s can avail t%is facility (%en t%ere is considera$le s%ortfall of liquidity& Ban"s can $orro( funds up to 3; of t%eir net demand and time lia$ilities ,@>*L-& MSF can $e availed on overni %t $asis& Min&
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request si'e is Re&2 crore& MSF is availa$le $et(een 4&47 p&m& to 5&47 p&m& (&e&f 2<&<&22, In vie( of rupee depreciatin in t%e last si+ (ee"s, MSF rate (as recali$rated (&&e&f& 29&79&3724 477 $asis points a$ove t%e policy repo rate under LAF& Consequently present MSF rate (as 27&3:; &,(&e&f&29&79&3724-& Ao(ever, in Mid 0Buarter Policy Revie( on 37&78&3724, RBI %ad reduced MSF rate $y 9: $asis points from 27&3:; to 8&:7; (&e&f& 37&78&3724& As rupee %as stren t%ened RBI eased liquidity $y decreasin MSF rate ! t%e present MSF rate is C&9:;&& Major C%an es on Policy Rates in Annual Credit Policy 3722.23 Based on recommendations of Dor"in ?roup to revie( t%e /peratin Procedure of Monetary Policy in India ,C%airman# S%ri& >eepa" Mo%anty, =+ecutive >irector, RBI- RBI declared in its Annual Policy 3722.23 as follo(s& i& *%ere (ill %encefort% $e only one independently varyin policy rate and t%at (ill $e Repo Rate& ii& *%e Reverse Repo Rate (ill continue to $e operative $ut it (ill $e pe ed at a fi+ed 277

$asis points $elo( t%e repo rate& It (ill no lon er $e an independent rate&A ne( Mar inal Standin Facility ,MSF- (as instituted from (%ic% Sc%eduled Commercial Ban"s ,SCBscan $orro( overni %t up to one percent of t%eir respective @>*L& *%e rate of interest on amount accessed from t%is facility (ill $e 277 $asis points a$ove t%e repo rate& iii& As per a$ove sc%eme, t%e revised corridor (ill %ave a fi+ed (idt% of 377 $asis points& *%e repo rate (ill $e in t%e middle& *%e reverse repo rate (ill $e 277 $asis points $elo( Repo rate and t%e MSF rate 277 $asis points a$ove it& a& RBI (ill %ave t%e fle+i$ility to c%an e t%e corridor&In vie( of RBI declarin MSF rate to $e

C&9:; ! reverse repo rate to $e <&9:;;

t%e present corridor is 377 $asis points ,3;-&

Cas% Reserve Ratio ,CRR- ESec&53,2- of RBI Act 2845 # *%is is t%e percenta e of cas% deposits t%at $an"s %ave to maintain (it% RBI & An increase in CRR means t%at $an"s %ave to par" more money (it% RBI and %ence a %i %er CRR suc"s out liquidity from $an"in system & F It a ain increases t%e cost of funds for t%e $an"s and results in %i %er interest out o for t%e customer& In 377C, RBI slas%ed CRR to infuse liquidity into t%e financial system and rates slipped due to e+cess liquidity& *%e floor ! ceilin limit for CRR %ad $een 4; to 37; of t%eir @>*L& Ao(ever (&e&f& 331<1377<, RBI is empo(ered to fi+ CRR (it%out any floor or ceilin limit& RRBs
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also %ave to maintain same CRR as applica$le to Sc%eduled Commercial Ban"s& Present CRR is 5 ;,(&e&f& fortni %t $e innin Fe$ruary 8,3724-& @on.Sc%eduled Com& Ban"s ,not included in 3 nd sc%edule of RBI %ave to maintain CRR of 4;& Statutory Liquidity Ratio ,SLR-Sec&35 of Ban"in Re ulation Act 2858 ,Sec&35 of BRA 2858=very $an" %as to "eep an assured amount of funds in cas%, old or ovt& $onds $efore lendin to customers& *%is measure controls t%e $an")s credit e+pansion& Increase in SLR can lead to %i %er lendin rates for $orro(ers& Current SLR is 34; ,(&e&f& 22&7C&3723Ban" Rate# As per Sec& 58 of RBI Act 2845, Ban" Rate is t%e rate at (%ic% RBI is prepared to $uy or rediscount $ills of e+c%an e or ot%er commercial papers eli i$le for purc%ase under RBI Act2845& G Ban" Rate $y RBI stands reduced to C&9:; equivalent to MSF rate&& Additional Measures taken by RBI to address Exchange Market Volatility : *%e overall limit for access to LAF $y eac% individual $an" is set at 7&:; of its o(n @>*L outstandin as on t%e last Friday of t%e second precedin fortni %t& =ffective from 35&79 3724& Ban"s (ere maintainin minimum 97; of t%e required CRR on daily $asis& =ffective from first day of reportin fortni %t i&e&39&79 3724, $an"s (ere required to maintain a minimum daily CRR $alance of 88; of on an avera e daily $asis& Ao(ever, RBI on 37&78&3724 reduced t%e minimum daily maintenance of CRR from 88; to 8:; effective from fortni %t $e innin 32&78&3724& Prepared ! Hpdated By B,6,I=>, Faculty M=* on 42&23&3724