We are very much thankful to those people from

whom we have got help during the preparation of

this presentation.

We wish to express our gratitude to Ms. Shagun

Arora of NIS Academy under whose advice and
guidance we have completed this presentation.
This presentation is prepared by the full
cooperation of our team members with team
spirit

 The part of the economic policy which regulates the level of

money in the economy in order to regulate inflation, improve
balance of payments, increase gross national product etc. RBI,
in case of India controls the monetary policy.
The policy statement traditionally announced twice a year
through which RBI insures Price stability for the economy.
April-September - Slack Season Policy
October-March

- Busy Season Policy

RBI reserves its right to alter monetary policy to time to time

depending upon state of economy

Maintain price stability

Flow of credit to the productive sector of economy
Stability of national currency
Growth in employment & income
Achieving foreign exchange stability
Managing suitable level of investment and savings
Regulating rate of interest & induce higher level of
investment
Achieving monetary equilibrium to ensure equality
between demand & supply of money.

Bank Rate-The rate at which RBI extends

credit to comm. Banks .
CRR-The percentage of banks deposits
which they must keep as cash with RBI.
SLR-A comm. Bank has to keep a portion of
total deposits with itself in liquid assets.
Open Market Operations
LAF Repo & reverse Repo
MSS Market stabilization scheme

Selective quality control

Rationing of credit.
Margin requirement
Variable interest rate
Regulation of consumer credit
Licensing to ensure proper regional
coverage
They can be negative in character
intended to discourage activities which
are regarded as inessential or
undesirable.

 SLR should not be used for directed investment in

PSUs. It should be lower down to minimum limit
of 25%
CRR should be lower than the present rate. As an
instrument it should be used less & Govt. should
depend upon OMOs.
Selective credit control should be slowly phased
out
Prime lending rate of commercial bank should be
independent of RBI control

 Banks use this rate to price their Long

term loans to individual and companies
Increase in Bank rate Increase in lending
rate of Commercial Banks Decline in
aggregate money expenditure lowering
inflation and vice versa.
This tool now not much in use and remains
same since years .

Bank Rate

In 1940s BR was at
low 3% and
remained
unchanged till
1953.In 1953 RBI
adopted policy
controlled expansion
BR raised to 3.5%.It
reached at max.
level in 1991 12%.
Presently it is 6%

RBI has the power to vary this ratio and there by

use it as an instrument of Credit Control.
Permissible limit is 3 to 15%(1962)
It is essential for a bank to maintain the ratio or
otherwise it may not be able to meet the
withdrawal demand of all its depositors, and
failure to do so may eventually result in failure of
the bank.
Increase in CRR
reduce the excess
reserves available to a bank for lending
contracting Credit
Increase in CRR
absorbs Foreign Capital
Inflows checking rupees appreciation.

 In beginning it was
5% of demand
deposit & 2% of time
deposits
Reached max. in
1991,92 after 1993 it
followed Narsimham
report & decreased.
But from dec.06 it
raised 7 times, 250bp
to cool credit growth
& supply.

 Statutory Liquidity Ratio

Narsimham committee recommended to
reduced it at minimum level. According to
that it is 25%and remains unchanged.
Khan committee suggested abolishment
of SLR.
The buying & selling of these securities laid the
foundation of the 1992 Harshad Mehta scam.

It was 25% in 1949

after that it increased
continuously
32%(1972)--- 35%
(1981)---36%(1984)--38%(1988).
From 1997 it is
constant at 25%

 Open Market Operations-these refer to

the sale and purchase of Govt.
securities by the RBI
The main objective of these
operations has been to stabilizes the
prices of Govt. securities. The control
of inflationary pressures has, however
been the secondary objectives.
It is used several times after 1991 for
controlling inflows.

 Repo Rate
This is the rate at
which the central bank
adds funds to the monetary
market. Present rate 7.75%

Reverse Repo Rate

The rate at which
the central bank borrows
funds from the market. It
impacts Govt. bond yields
and short term bank
deposits. Present rate 6%

 Govt. agenda and development plans

Recommendation of Narshimham
committee,Tarapore committee and Khan
committee report.
Inflation and price situation.
Credit and liquidity condition.
Foreign money inflow (specially USD)
IMF and World bank.

 The RBI is likely to keep its Monetary

policy tight in view of the uncertainties in
global financial markets and high prices of
crude oil and food items.
The US Fed Reserves rate cuts put
pressure on RBI to lower rates. The
immediate pressure would come from the
FOREX market with bankers expecting the
rupees to firm up against the USD.

 RBI in extraordinary condition devaluated

Rupees 3 times in past .
In Sep.1949-30.5%.(Due to Shadow of
Colonial system and aim of overall growth).
In June 1966-36.5%(Due to crop failure and
Indo-pak.war).
In 1991-20% in 3 phase (Due to economic
stagnation and failure of PSUs).
After 1992-93 Rupees headed towards full
convertibility. Now value of Rupees almost
depends upon free market forces of
demand &supply.

Interest Rate
1990

1994

1995-97

All sector-specific
The minimum rate
The ceiling on
Interest rate prescriptions prescription withdrawn. rate on deposits
Were abolished
Bank free to charge
were removed
PLR

2003
Bank were
advised to
announce a
benchmark
PLR

2008
Bank are advised to be
Proactive in credit scenario
1.Economy opens in 1990 and reforms start.
2.Narsimham committee for autonomy in banking sector.
3.Second generation reforms from 2001.
4.Banks have to compete with multinational banks in 21st century.

Inflation & price control

It is characterized by increase in quantity of
money in proportion to buying power.
According to Castle and Keynes domestic price
stability should be main objective of central
banks monetary policy.
RBI declared its policy endeavour would be to
keep inflation close to 5%.
For controlling inflation RBI adopted cheap or
dear credit policy and selective credit control.

On Foreign Exchange
RBI has to maintain equilibrium rate of exchange
because any change in rate will have
repercussion on BOP of India.
RBI generally uses CRR and Repo rates for
checking inflow or outflow foreign currency
From 2000 control of RBI on foreign exchange
become less under FEMA act.
2001 onwards exchange rate is decided by
market forces and RBI only monitor the process.