A Study on empirical

impact of RBI policies on the

Indian Economy

Presented by:
Rekha Bhojwani (178070592017)
Nishi patel (178070592104)
INTRODUCTION TO RBI
 Reserve Bank of India is also known as India's Central Bank.
 It was established on 1st April 1935.
 Although the bank was initially owned privately, it has been taken up the
Government of India ever since, it was nationalized.
 The bank has been vested with immense responsibility of reviewing and
reconstructing the economic stability of the country by formulating economic
policies and ensuring a proper exchange of currency.
 In this regard, the Reserve Bank of India is also known as the banker of banks.
 Th
RBI POLICIES:
 THE MAIN MEASURES OF THE MONETARY
POLICY FOLLOWED BY THE RBI ARE:
 CRR (CASH RESERVE RATIO):
• Every commercial bank has to keep certain minimum cash reserves with RBI.
• RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the
reserve requirement depending on whether it wants to affect a decrease or an increase in
the money supply.

 SLR(STATUTORY LIQUIDITY RATIO):

• Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash
and approved securities.
• RBI has stepped up liquidity requirements for two reasons: - Higher liquidity ratio forces
commercial banks to maintain a larger proportion of their resources in liquid form and thus
reduces their capacity to grant loans and advances thus it is an anti-inflationary impact.
• A higher liquidity ratio diverts the bank funds from loans and advances to investment in
government and approved securities.
 REPO RATE:
• Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which
the RBI lends money to the commercial banks for a short-term (max. 90 days).
• When the repo rate increases, borrowing from RBI becomes more expensive. If RBI
wants to make it more expensive for the banks to borrow money, it increases the repo
rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the
repo rate.
 REVERSE REPO RATE:
• Reverse Repo rate is the short term borrowing rate at which RBI borrows money from
banks.
• The Reserve bank uses this tool when it feels there is too much money floating in the
banking system.
• An increase in the reverse repo rate means that the banks will get a higher rate of
interest from RBI.
 BANK RATE:
• RBI (Reserve Bank of India) lends to the commercial banks through its discount window
to help the banks meet depositor’s demands and reserve requirements.
• The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI
wants to increase the liquidity and money supply in the market, it will decrease the bank
rate and if it wants to reduce the liquidity and money supply in the system, it will
increase the bank rate.
 MSF(MARGINAL STANDING FACILITY):
• This scheme was introduced in May 2011 and all the scheduled commercial bank can
participate in this scheme.
• Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank
of India in an emergency situation when inter-bank liquidity dries up completely.
 LIQUIDITY ADJUSTMENT FACILITY (LAF):
• Liquidity Adjustment facility was introduced in 2000.
• LAF is a facility extended by the Reserve Bank of India to the scheduled commercial
banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement
• Also park excess funds with the RBI in case of excess liquidity on an overnight basis
against the collateral of Government securities including State Government securities.
 OPEN MARKET OPERATION (OMO):
• Open market operation is the activity of buying and selling of government securities in
open market to control the supply of money in banking system.
• When there is excess supply of money, central bank sells government securities
thereby sucking out excess liquidity
THE ROLE AND FUNCTIONS OF R.B.I IN
INDIAN ECONOMY:
 The Role of RBI are as follows:
 Issue of Currency Notes
 Banker to other Banks
 Banker to the Government
 Exchange Rate Management
 Credit Control Function
 Supervisory Function
 DEVELOPMENTAL OR PROMOTIONAL FUNCTIONS:
 Development of the Financial System:
• The financial system comprises the financial institutions, financial markets and
financial instruments.
• The sound and efficient financial system is a precondition of the rapid economic
development of the nation.
 Development of Agriculture:
• In an agrarian economy like ours, the RBI has to provide special attention for the
credit need of agriculture and allied activities.
• It has successfully rendered service in this direction by increasing the flow of credit to
this sector.
 Provision of Industrial Finance:
• Rapid industrial growth is the key to faster economic development.
• In this regard, the adequate and timely availability of credit to small, medium and
large industry is very significant.
 NEED OF THE STUDY

 One of the key roles of the Reserve Bank of India or any central bank is to ensure
economic stability in the country .
 For the purpose, the central bank adopts various measures to ensure that the
inflation rates, interest rates, exchange rates and money supply remains under
control.
 It uses tools like Cash Reserve Ratio and Repo rates to control liquidity and inflation
in the country. The effectiveness of such policy rates in ensuring economic stability
needs to be verified and tested.
 The decision maker needs to understand the effect of these changes on the
affected variable.
 This given research is such an attempt to test and verify the effectiveness of the
changes in monetary and policy rates on the desired critical factors.
 The research is aimed to provide inputs to decision makers in formulating monetary
and economic policies and contributes to the limited existing literature on the
subject.
 IMPORTANACE OF THE STUDY:
 Reserve Bank of India (RBI) is the central banking and monetary authority of India. The
loans which the banks and non-banking financial institutions offer to government
entities, businesses, and consumers, are controlled by the Reserve Bank of India (RBI).

 The study that will be conducted can be of use for the following:
 This will give an idea about the impact of RBI policies on various factors of Indian
economy.
 This will helpful to 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.
 It will also show a comparison of RBI policies with other countries policies and give a
brief about which factor is highly impact on Indian economy by world’ policies and
how it’s different from Indian policies.
 IDENTIFICATION OF THE PROBLEM:

 The monetary policy strategy of a Central bank depends on a number of factors

that are unique to the country and the context.
 Given the policy objectives, any good strategy depends on the macroeconomic
and the institutional structure of the economy.
 It is important to recognize that all the objectives cannot be effectively pursued
by any single arm of economic policy.
 Hence, there is always the problem of assigning to each instrument the most
appropriate target or objective.
 It is clear from both the theoretical literature and the empirical findings that,
among various policy objectives, monetary policy is best suited to achieve the
goal of price stability in the economy.
 It is well recognized that monetary policy is conducted within a particular
framework.
 The relationship among different segments of the market and sectors of the
economy is also involved in this framework.
 As part of the ongoing process of reforms, it is necessary to improve standards,
codes and practices in matters relating to financial system and bring them on par
with international ones.
 Some items of significance for further research in the realm of monetary policy in
India.
 To unrelenting regime of very high real rates of interest that the Reserve Bank of
India has imposed upon the country.
 To use of monetary policy to maintain credit and deposit rates in the economy by
Inflation targeting that are higher than the actual or anticipated rate of inflation.
 The general objective of the research is to understand the interrelationship amongst
selected macroeconomic variables, for effective monetary policy making.
 The specific objective is to understand the dynamics between monetary policy
rates and ratios with inflation, liquidity and foreign exchange as the three key
functions of the Reserve Bank of India (RBI) are controlling inflation, liquidity
management and stabilizing foreign exchange rate.
 RBI has been using the policy rates such as Repurchase rate (Repo),
Reverse Repurchase rate (Reverse Repo), Bank Rate and statutory ratios
such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to
tame inflation and control liquidity in the economy but the effectiveness of
this policy needs to be studied.
 The study tries to understand the dynamics between monetary policy,
inflation and liquidity by working on various tools and drawing conclusions
based on the analysis.
 In today‘s altered economic context, a low and stable price environment is
being increasingly regarded as an essential condition for bringing down the
nominal interest rate and for improving the growth and productive
potential of the economy.
 RESEARCH QUESTIONS
 What is the impact of RBI policy on India’s macroeconomic factors?

 Are the tools used by RBI sufficient enough to cater economic growth?

 How RBI controls the working of Indian economy with the help of such tools?

 What changes can be made to suggest the overall country’s progress?

 How RBI policies are different from other nations? Are there any changes that could
be adaptable to the Indian economy?

 What would be the impact on the country if any changes in the RBI policies are
made?
 RESEARCH METHODOLOGY
 DESCRIPTIVE (LONGITUDE) RESEARCH:
 A detailed picture regarding the situation can be only studied with the help of Descriptive
research.
 A descriptive study is one in which information is collected without Changing the
environment (i.e., nothing is manipulated).
 It is used to obtain information concerning the current status of the occurrences to
describe & what exists and what not with respect to variables or conditions in a situation.
 Here we have used Descriptive longitude research to study the detailed events in the
Indian economy and the probable impact of these RBI tools on certain parameters
 SOURCES OF DATA COLLECTION
 Primary data and Secondary Data collection has been used in the project.
 Primary Data Collection: A panel of experts were sat together to collect information
regarding their opinions on the monetary policy and its functioning in the Indian economy.
 Secondary Data Collection: The secondary data collection was taken on quarterly basis
for all the four quarters. The data was taken for the period of 15 years from 2004 to 2018.
The tools used by RBI were taken and their impact on the parameters were studied.
 Instruments taken as a part of study are as
• REPO RATE
• REVERSE REPO RATE
• BANK RATE
• SLR
• CRR
• MSF
 Parameters for the study are as
• GDP
• GOLD
• INFLATION
• SENSEX
• DOLLAR
• CRUDE OIL
 SCOPE OF THE STUDY
• The research is done to study the effectiveness of the tools of RBI policies for the
past 15 years.
• The Scope of research is limited to the Indian Economy only.
• With the help of this research we can easily understand the impact of RBI policies
on various parameters which will help in the development of the Indian
Economy.
 RESEARCH PROCESS:
 The research process involve a number of inter related activities which does not
rigidly follow a particular sequence following are the various steps in the
research methodology process.
1. Formulating the research problem
2. Choice of research design
3. Determining source of data
4. Determining sampling design and sampling size
5. Organizing and conducting the field survey
6. Processing and analyzing the collected data
7. Preparing the research report.
 SAMPLING PLAN:
• Sample size:-The total sample size of the project is last 15 years data of the
above mentioned tools and parameters
• Sampling Method: - Convenience sampling.
• Sample Unit: - Indian Economy.
• Sampling Element:- The tools used by the Reserve Bank of India to govern the
Indian Economy.
 TOOLS FOR STUDY:
 REGRESSION ANALYSIS
• Regression analysis is a reliable method of identifying which variables have
impact on our economy. The process of performing a regression allows you to
confidently determine which factors matter most, which factors can be
ignored, and how these factors influence each other.
• In order to understand regression analysis, it’s essential to comprehend the
following terms:
• Dependent Variable: This is the main factor that you’re trying to understand or
predict.
• Independent Variables: These are the factors that you hypothesize have an
impact on your dependent variable
 ANNOVA
 An ANOVA test is away to find out if survey or experiment results are significant. In
Other words, they help to figure out the need to reject the null hypothesis or accept.
The alternate hypothesis. It requires testing groups to see if there’s a difference
between them.

 COEEFICENTS
 Coefficients in regression analysis work together to tell you which relationships in your
model are statistically significant and the nature of those relationships.
The coefficients describe the relationship between each independent variable and
the dependent variable. The negative coefficients represent the inverse relationship
while the positive coefficient represents a linear relationship between two variables.
Repo Rate

Tools/ Parameters GDP INFLATION DOLLAR CRUDE OIL STOCK MARKET GOLD

INVERSE(r=- INVERSE(r=-
Relation 0.305) 0.074) LINEAR(r=0.371) LINEAR(r=0.409) LINEAR(r=0.218) LINEAR(r=0.218)

impact minor (s=0.019) major(s=0.595) minor(s=0.04) minor(s=0.01) major(s=0.094) major(s=0.094)

Bank Rate
INVERSE(r=- possitve(r=0.534
Relation 0.364) LINEAR(r=0.163) ) LINEAR(r=0.360) LINEAR(r=0.557) LINEAR(r=0.557)

impact minor (s=0.01) major(s=0.213) major(s=0.00) major(s=0.05) major(s=0.00) major(s=0.00)

Cash reserve ratio
INVERSE(r=- INVERSE(r=- INVERSE(r=- INVERSE(r=- INVERSE(r=0.411
Relation LINEAR (r=0.542) 0.642) 0.649) 0.454) 0.411) )
impact major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.01) major(s=0.01)
Statutory liquidity ratio
LINEAR INVERSE(r=- INVERSE(r=- INVERSE(r=- INVERSE(r=- INVERSE(r=-
Relation (r=0.3840) 0.920) 0.925) 0.905) 0.800) 0.800)

impact major(s=0.002) major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.00)

MARGINAL STANDING
FACILTITIES

Relation LINEAR (r=0.104) LINEAR(0.607) LINEAR(r=0.575) LINEAR(r=0.477) LINEAR(r=0.706) LINEAR(r=0.706)

impact major(s=0.429) major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.00) major(s=0.00)

 Suggestions
 Repo Rate
• 1)To control inflation RBI must increase the repo rate.
• Reason: During high levels of inflation, RBI makes strong attempts to reduce the money
supply in the economy.
• One way to do this is to increase the repo rate. This makes borrowing a costly affair for
businesses and industries, which in turn slows down investment and money supply in the
economy. As a result, it negatively impacts the growth of the economy. This also helps
bring down inflation.
• 2)As repo rate increases the cost of buying gold and stocks also increases hence repo
rate should be decreased if stock markets and performing low and investments in gold is
less.
• Reason: this is because banks and other financial institutions often increase the rates they
charge their customers to borrow money. Individuals are affected through increases to
credit card and mortgage interest rates, especially if these loans carry a variable interest
rate. This has the effect of decreasing the amount of money consumers can spend. After
all, people still have to pay the bills, and when those bills become more expensive,
households are left with less disposable income. This means people will spend less
discretionary money, which will affect businesses' revenues and profits.
 Bank Rate
 Bank rates majorly affect the Inflation, Dollar, Crude, Stock and gold and bank rate
an increase in bank rate can lead to less money supply in the economy leading to
increase in dollar, crude, stock and gold price and a decline in GDP.
 Reason: Because it costs them more to borrow money, financial institutions often
increase the rates they charge their customers to borrow money.
 Individuals are affected through increases to credit card and mortgage interest
rates, especially if these loans carry a variable interest rate.
 This has the effect of decreasing the amount of money consumers can spend.
 After all, people still have to pay the bills, and when those bills become more
expensive, households are left with less disposable income. This means people will
spend less discretionary money, which will affect businesses' revenues and profits.
 Cash Reserve Ratio and Statutory liquid Ratio :

• If RBI wants to uplift investments in stock market and gold prices as well as needs to
control the dollar and crude oil prices then RBI needs to reduce CRR.
• Reason:
• Hikes in CRR leading to raise interest rates have several implications including.
• Slowing down the overall growth in the economy; this effectively means that
demand for goods and services, and investment activity, gets adversely impacted.
• Apart from the fact that overall growth is impacted, companies take a hit on
account of higher interest costs that they have to bear on their outstanding loans (to
the extent their cost of funds is not locked in).
• Since some investors tend to leverage and invest in the stock markets, higher interest
rates increase expectation of returns from the stock markets; this has the impact of
lowering current stock prices.
Suggestions.
 The monetary tools of RBI has a major impact in the working of the economy hence
the tools must be used wisely to function the economy in a smooth manner.
 To function the economy effectively RBI must constantly monitor the impact of such
tools
 The decision regarding the increase or decrease in the rates must be taken as bird eye
view as it impacts the each and every person in economy.
 There must be a balance kept between the lending and the borrowing rates. If
lending rates are kept high people tend to save more for more interest leading to less
spending. If the borrowing rates are kept high people may not wish to borrow and
might decrease the standard of living.
Conclusions:

 The Reserve Bank of India is the Central bank of India which takes major decisions
regarding the Indian economy.
 The monetary policy of RBI uses tools such as CSR,SLR, MSF, Bank Rate, Repo Rate to
govern the Indian Economy.
 The project studies the impact of RBI policies on various parameter namely GDP, Stock
prices, gold, Crude oil and Inflation.
 The tools used by RBI bring a major impact on the Indian Economy.
 RBI needs to take effective decisions to use these tools.
 Repo rates is one of the major tools that has an impact over the economy
 Amongst the parameter Gold and Stock prices are highly sensitive and go hand in hand
with each other.
 GDP is the least affected parameter
 Inflation and dollar price affect the highly affect the consumers
 When deciding the rates the reserve bank needs to think in two approach from the
investor perspective and the consumer perspective