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[[Monetary policy]] is the process by which monetary authority of a country |
[[Monetary policy]] is the process by which the monetary authority of a country, generally central bank controls the supply of money in the economy.<ref>[http://www.investopedia.com/terms/m/monetarypolicy.asp Monetary Policy], Investopedia</ref> In India, the central monetary authority is the [[Reserve Bank of India]] (RBI). |
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, generally central bank controls the supply of money in the economy by its control over interest rates in order to maintain [[price stability]] and achieve high economic growth.<ref>[http://www.investopedia.com/terms/m/monetarypolicy.asp#ixzz1aDVp7Xj8 Investopedia: Monetary Policy]</ref> In India, the central monetary authority is the [[Reserve Bank of India]] (RBI). |
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It is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:- |
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; Price Stability |
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: Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability. |
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; Controlled Expansion Of Bank Credit |
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: One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output. |
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⚫ | The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide a statutory and institutionalised framework for a [[Monetary Policy Committee of India|Monetary Policy Committee]], for maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to maintain inflation within the specified target level. As per the provisions of the RBI Act, three of the six Members of the Monetary Policy Committee will be from the RBI and the other three Members will be appointed by the Central Government. |
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; Promotion of Fixed Investment |
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: The aim here is to increase the productivity of investment by restraining non essential fixed investment. |
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The Government of India, in consultation with RBI, notified the 'Inflation Target' in the Gazette of India Extraordinary dated 5 August 2016 for the period beginning from the date of publication of the notification and ending on 31 March 2021 as 4%. At the same time, lower and upper tolerance levels were notified to be 2% and 6% respectively. Inflation rate in 2020 is 6.2% .<ref>{{Cite web|url=http://pib.nic.in/newsite/PrintRelease.aspx?relid=151264|title = Monetary Policy Committee constitution under the Reserve Bank of India Act, 1934 notified}}</ref><ref name="Reserve Bank of India">{{Cite web|title=Reserve Bank of India|url=https://www.rbi.org.in/home.aspx|access-date=9 October 2020|website=www.rbi.org.in}}</ref><ref name="RBI data">[http://www.rbi.org.in/scripts/chro_bankrate.aspx Data] taken from RBI {{webarchive|url=https://web.archive.org/web/20110829103346/http://www.rbi.org.in/scripts/chro_bankrate.aspx |date=29 August 2011 }}</ref><ref>[http://www.rbi.org.in/scripts/governors.aspx#bhatt Credit Authorization Scheme Came Into Existence During the Tenure of P C Bhattacharya<!-- Bot generated title -->]</ref><ref name=":0">{{Cite web|url=http://www.rbi.org.in/home.aspx|title = Reserve Bank of India}}</ref> |
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; Restriction of Inventories and stocks |
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: Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization. |
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; To Promote Efficiency |
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: It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc. |
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; Reducing the Rigidity |
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: RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system. |
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⚫ | The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide |
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The Government of India, in consultation with RBI, notified the 'Inflation Target' in the Gazette of India Extraordinary dated 5th August 2016 for the period beginning from the date of publication of this notification and ending on the March 31, 2021 as 4%. At the same time lower and upper tolerance levels were notified to be 2% and 6% respectively.<ref>http://pib.nic.in/newsite/PrintRelease.aspx?relid=151264</ref> |
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==Monetary operations== |
==Monetary operations== |
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Monetary operations involve monetary techniques which operate on monetary magnitudes such as [[money supply]], interest rates and availability of [[credit (finance)|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]]. RBI takes into account the following monetary policies: |
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[[File:Bank rate.jpg|thumb|right|Bank rate graph from 1991 to 2011]] |
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These instruments are used to control the money flow in the economy,anushkar |
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; Open Market Operations |
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: An open market operation is an [[Financial instrument|instrument]] of [[monetary policy]] which involves buying or selling of government [[securities]] from or to the public and [[bank]]s. 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. |
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[[File:Cash r r.jpg|thumb|right|CRR Graph from 1992 to 2011<ref>[http://www.rbi.org.in/scripts/chro_bankrate.aspx CRR DATA TAKEN FROM RBI<!-- Bot generated title -->]</ref>]] |
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The key indicators as of 8 February 2023 are<ref>[http://www.rbi.org.in/home.aspx Current Policy Rates, Reserve Ratio], Reserve Bank of India</ref> |
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; Cash Reserve Ratio |
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: 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 4 October 2016, the CRR is 4.00 percent.<ref>[http://www.rbi.org.in/home.aspx]</ref> |
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; Statutory Liquidity Ratio |
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: 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 Narsimham Committee. The current SLR is 21%.<ref>https://rbidocs.rbi.org.in/rdocs/Wss/PDFs/5TB4828141FBB549A7ACE96116ED78E69C.PDF</ref> |
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; Bank Rate Policy<ref>[http://www.rbi.org.in/scripts/chro_bankrate.aspx Bank rate data taken from RBI]</ref> |
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: 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, [[International Finance Corporation|IFC]], [[Exim Bank (India)|EXIM Bank]], and other approved financial institutes. Funds are provided either through lending directly or discounting 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 in 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 on 2nd August 2017, bank rate is 6.25 percent.<ref>[https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11076&Mode=0 Change in Bank Rate as per RBI notification]</ref> |
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; Credit Ceiling |
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: 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 examples of ceiling are agriculture sector advances, priority sector lending. |
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; Credit Authorization Scheme |
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: 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.<ref>[http://www.rbi.org.in/scripts/governors.aspx#bhatt CREDIT AUTHORIZATION SCHEME CAME INTO EXISTENCE DURING THE TENURE OF P C BHATTACHARYA<!-- Bot generated title -->]</ref> |
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; Moral Suasion |
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: 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. |
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; Repo Rate and Reverse Repo Rate |
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: Repo rate is the rate at which RBI lends to its clients 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. |
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{{As of|2017|December|06}}, the key indicators are<ref>[http://www.rbi.org.in/home.aspx Current Policy Rates, Reserve Ratio], Reserve Bank of India</ref><ref>[http://www.indiabulls.com/securities/market/Useful_Information/Credit_Policy_10_11/quarter/CPR_1Q_FY10.htm Key Indicators], IndiaBulls.com</ref> |
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{| class="wikitable" |
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! Indicator || Current rate |
! Indicator || Current rate |
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| Inflation || |
| Inflation || 6.52% (23 Jan) |
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|-| Bank rate || 6.5% <ref>[https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10331&Mode=0 Change in Bank Rate as per RBI notification]</ref> |
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| CRR || 4.50% |
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| SLR ||18.0% |
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| SDF || 6.25% |
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| MSF || 6.75% |
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|Bank rate || 6.75% |
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| Reverse repo rate || 3.35% |
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| Repo rate || 6.0% <ref>[http://www.moneycontrol.com/news/economy/rbi-cuts-repo-rate-by-25-bps-to-625_7569001.html]</ref> |
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| Repo rate || 6.5% |
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| GDP forecast || 6.8% FY23 |
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| Marginal Standing facility rate ||6.25%<ref>[https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10329&Mode=0]</ref> |
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== References == |
== References == |
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{{commons category|Money of India}} |
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{{Reflist}} |
{{Reflist}} |
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{{Policies of India}} |
{{Policies of India}} |
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{{Central banks}} |
{{Central banks}} |
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{{Reserve Bank of India}} |
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{{Authority control}} |
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[[Category:Banking in India]] |
[[Category:Banking in India]] |
Latest revision as of 06:30, 14 April 2024
Monetary policy is the process by which the monetary authority of a country, generally central bank controls the supply of money in the economy.[1] In India, the central monetary authority is the Reserve Bank of India (RBI).
Monetary policy committee
The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to maintain inflation within the specified target level. As per the provisions of the RBI Act, three of the six Members of the Monetary Policy Committee will be from the RBI and the other three Members will be appointed by the Central Government.
The Government of India, in consultation with RBI, notified the 'Inflation Target' in the Gazette of India Extraordinary dated 5 August 2016 for the period beginning from the date of publication of the notification and ending on 31 March 2021 as 4%. At the same time, lower and upper tolerance levels were notified to be 2% and 6% respectively. Inflation rate in 2020 is 6.2% .[2][3][4][5][6]
Monetary operations
Instruments of monetary policy
Key indicators
The key indicators as of 8 February 2023 are[7]
Indicator | Current rate |
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Inflation | 6.52% (23 Jan) |
CRR | 4.50% |
SLR | 18.0% |
SDF | 6.25% |
MSF | 6.75% |
Bank rate | 6.75% |
Reverse repo rate | 3.35% |
Repo rate | 6.5% |
GDP forecast | 6.8% FY23 |
References
- ^ Monetary Policy, Investopedia
- ^ "Monetary Policy Committee constitution under the Reserve Bank of India Act, 1934 notified".
- ^ "Reserve Bank of India". www.rbi.org.in. Retrieved 9 October 2020.
- ^ a b c Data taken from RBI Archived 29 August 2011 at the Wayback Machine
- ^ Credit Authorization Scheme Came Into Existence During the Tenure of P C Bhattacharya
- ^ "Reserve Bank of India".
- ^ Current Policy Rates, Reserve Ratio, Reserve Bank of India