Monetary

Policy
The actions of a central bank, currency board
or other regulatory committee that determine
the size and rate of growth of the money
supply, which in turn affects interest rates.
Monetary policy is maintained through actions
such as increasing the interest rate, or
changing the amount of money banks need to
keep in the vault (bank reserves).

Monetary
Measures

and

Liquidity

On the basis of an assessment of the current

and evolving macroeconomic situation, it has
been decided to:

keep the policy repo rate under the

liquidity adjustment facility (LAF) unchanged
at 7.25 per cent;

keep the cash reserve ratio (CRR) of

scheduled banks unchanged at 4.0 per cent of
net demand and time liability (NDTL);

continue to provide liquidity under

overnight repos at 0.25 per cent of bank-wise
NDTL at the LAF repo rate and liquidity under
14-day term repos as well as longer term
repos of up to 0.75 per cent of NDTL of the
banking system through auctions; and

Continue with daily variable rate repos

and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the
LAF will remain unchanged at 6.25 per cent,
and the marginal standing facility (MSF) rate
and the Bank Rate at 8.25 per cent

Joining the debate over the powers of RBI

Governor in setting policy rate, bank's former
head C Rangarajan today said the
government can do away with the veto power
of Governor but the majority of members in
the Monetary should be from the apex bank.
Rangarajan's comments come at a time when
the government and RBI are finalising the
structure of the Monetary Policy Committee
(MPC), which will decide the interest rates.
"The Monetary Policy Framework Agreement
has put the onus of inflation management on
RBI. I would think that the MPC should have a
majority of members from the RBI and the
veto power of Governor can be done away
with," Rangarajan told PTI.

The Finance Ministry is expected to soon float

a Cabinet note, which might suggest a sixmember MPC with three members each from
the RBI and the government. "In case there is
an equal representation from the RBI and
government, the casting vote should be with
the Governor," he said.
Under the present system, the Governor is
appointed by the government, but controls
monetary policy and has veto power over the
existing advisory committee of RBI members
and outside appointees that sets rates.
The revised draft of the Indian Financial Code
(IFC) as released by the Finance Ministry last
month had suggested doing away with this
veto power adding that the seven-member
MPC to take decisions by a majority vote. Of
the seven members, four would be
government nominees and the rest from RBI.
Bank's Governor Raghuram Rajan had earlier
this month favored doing away with the veto
power of the central bank chief, arguing it
would be better for a committee to decide the

key rate rather than one individual.

Rajan said that when a committee decides on
rates, it lessens the pressure on individual
and also ensures continuity in policy when
any single member of the committee
changes.
"A committee can represent different
viewpoints and study shows that its decisions
are typically better than an individual. "
"Second, spreading the responsibility of the
decision can reduce internal and external
pressure that falls on an individual. Third, a
committee will ensure broad monetary policy
continuity when any single member, including
Governor, changes," Rajan had said.
Monetary operations involve monetary
techniques which operate on monetary
magnitudes such as money supply, interest
rates and availability of credit aimed to
maintain Price Stability, Stable exchange rate,
Healthy Balance of Payment, Financial

stability, Economic growth. RBI, the apex

institute of India which monitors and regulates
the monetary policy of the country stabilizes
the price by controlling Inflation.

Major Operations

Open Market Operations

An open market operation is
an instrument of monetary policy which
involves buying or selling of
government securities from or to the
public and banks. This mechanism
influences the reserve position of the
banks, yield on government securities and
cost of bank credit. The RBI
sells government securities to control the
flow of credit and buys government
securities to increase credit flow. Open
market operation makes bank rate policy
effective and maintains stability in
government securities market.

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage
of bank deposits which banks are required
to keep with RBI in the form of reserves or
balances. Higher the CRR with the RBI
lower will be the liquidity in the system
and vice versa. RBI is empowered to vary
CRR between 15 percent and 3 percent.
But as per the suggestion by the
Narsimham committee Report the CRR
was reduced from 15% in the 1990 to 5
percent in 2002. As of September 2014,
the CRR is 4.00 percent.

Statutory Liquidity Ratio

Every financial institution has to maintain
a certain quantity of liquid assets with
themselves at any point of time of their
total time and demand liabilities. These
assets have to be kept in non cash form
such as G-secs precious metals, approved
securities like bonds etc. The ratio of the
liquid assets to time and demand liabilities
is termed as the Statutory liquidity
ratio.There was a reduction of SLR from
38.5% to 25% because of the suggestion
by Narshimam Committee. The current
SLR is 21.5 %( w.e.f.03/02/15).

Bank Rate Policy

The bank rate, also known as the discount

rate, is the rate of interest charged by the
RBI for providing funds or loans to the
banking system. This banking system
involves commercial and co-operative
banks, Industrial Development Bank of
India, IFC, EXIM Bank, and other approved
financial institutes. Funds are provided
either through lending directly or
rediscounting or buying money market
instruments like commercial bills
and treasury bills. Increase in Bank Rate
increases the cost of borrowing by
commercial banks which results into the
reduction in credit volume to the banks
and hence declines the supply of money.
Increase in the bank rate is the symbol of
tightening of RBI monetary policy. As of 3
February 2015, the bank rate is
8.75%.8.50% in 4th march 2015.8.25% in
2june 2015

Credit Ceiling
In this operation RBI issues prior
information or direction that loans to the
commercial banks will be given up to a

certain limit. In this case commercial bank

will be tight in advancing loans to the
public. They will allocate loans to limited
sectors. Few example of ceiling are
agriculture sector advances, priority
sector lending.

Credit Authorization
Scheme
Credit Authorization Scheme was
introduced in November, 1965 when P C
Bhattacharya was the chairman of RBI.
Under this instrument of credit regulation
RBI as per the guideline authorizes the
banks to advance loans to desired sectors.

Moral Suasion
Moral Suasion is just as a request by the
RBI to the commercial banks to take so
and so action and measures in so and so
trend of the economy. RBI may request
commercial banks not to give loans for
unproductive purpose which does not add
to economic growth but increases
inflation.

Repo Rate and Reverse Repo

Rate
Repo rate is the rate at which RBI lends to
commercial banks generally against
government securities. Reduction in Repo
rate helps the commercial banks to get
money at a cheaper rate and increase in
Repo rate discourages the commercial
banks to get money as the rate increases
and becomes expensive. Reverse Repo
rate is the rate at which RBI borrows
money from the commercial banks. The
increase in the Repo rate will increase the
cost of borrowing and lending of the banks
which will discourage the public to borrow
money and will encourage them to
deposit. As the rates are high the
availability of credit and demand
decreases resulting to decrease
in inflation. This increase in Repo Rate and
Reverse Repo Rate is a symbol of
tightening of the policy.