Monetary Policy


www.OnlineIAS.com


RBI RATES:
OMOs – Open Market Operations
They are of the following categories.
·        Policy rates
·        Reserve ratios



www.OnlineIAS.com


POLICY RATES:

REPO RATE
ü  Repo means repurchase.
ü  This is provided by the RBI to the banks against securities.
ü  If it is increased borrowing from RBI becomes more expensive.
ü  If RBI wants to make it more expensive to borrow then it increases repo rate.
ü  If RBI wants to provide more money to the banks then it reduces the repo rate.
ü  The current repo rate is 7.25% (wef June 2, 2015)
RBI à Banks

www.OnlineIAS.com



REVERSE REPO RATE
ü  In this mechanism the banks deposit excess liquidity with the RBI.
ü  When there are excess funds available with the banks they use RRR to deposit in the RBI
ü  The difference between repo rate and reverse repo rate is always 100 basis points
ü  The current reverse repo rate 6.25% (wef June 2, 2015)

www.OnlineIAS.com
                                               



BANK RATE
ü  This is the rate at which the RBI provides finance to commercial banks.
ü  This is used for short term purpose.
ü  Once it is revised by the RBI the banks also revise (either increase or decrease) deposit rates, base rates and Benchmark Prime lending rate.
ü  It also increases or decreases the equal monthly instalments (EMI).
ü  The current bank rate is 8.25% (with effect from June 2, 2015)

www.OnlineIAS.com



MARGINAL STANDING FACILITY RATE
ü  It was introduced in May 2011
ü  This is the rate at which banks borrow funds over night from the RBI against approved government securities.
ü  The banks get the loan against their excess Statutory Liquidity Ratio (SLR)
ü  Banks borrow money under MSF when there is an acute shortage of money.
ü  The present MSF is 8.25% (wef June 2, 2015)

www.OnlineIAS.com




RESERVE RATIOS:
ü  CRR – Cash Reserve Ratio.
ü  This is a mechanism to secure the monetary stability in the country.
ü  Previously it was between 3 and 20 percent and now it has been done away with.
ü  This is from the total Net Demand and Liabilities of the bank.
ü  Through this RBI either absorbs or releases the liquidity from the market.
ü  If CRR is increased there less money in the circulation.
ü  If it is reduced then more money is available in the market.
ü  Bank money is deposited with the RBI and it is completely secured and free of any risk. Second, controls the inflation because cannot send more money into the market.
ü  At present it is 4%.


What happens if CRR is reduced?
ü  RBI à Banks à Market

What happens if CRR is increased?

ü  Market à Banks à RBI

www.OnlineIAS.com



SLR – STATUTORY LIQUIDITY RATIO
ü  Statutory liquidity ratio
ü  This is the minimum proportion of the bank to be maintained net demand and time liabilities as liquid assets in the form of cash, gold etc.
ü  It regulates the credit growth in India.
ü  RBI can decide this up to 40 %
ü  At present it is 21.5 percent.


www.OnlineIAS.com