MONETARY POLICY

MONETARY POLICY
PRESENTED BY: Allam Santosh Sandeep Kumar Kumari Soni Gowthami Budarapu Uday Chandra Ravi Kiran Pramod Kumar

LIST OF CONTENTS

RBIs History RBI Functions Monitory policy

Functions of Monitory Policy

Credit controls of Monitory Policy

Quantitative credit control Qualitative credit control

ORIGINS OF THE RESERVE BANK OF INDIA

1926: The Royal Commission on Indian Currency and Finance recommended creation of a central bank for India. 1927: A bill to give effect to the above recommendation was introduced in the Legislative Assembly, but was later withdrawn due to lack of agreement among various sections of people. 1933: The White Paper on Indian Constitutional Reforms recommended the creation of a Reserve Bank. A fresh bill was introduced in the Legislative Assembly. 1934: The Bill was passed and received the Governor Generals assent

ORIGINS OF THE RESERVE BANK OF INDIA

1935: The Reserve Bank commenced operations as Indias central bank on April 1 as a private shareholders bank with a paid up capital of rupees five crore (rupees fifty million). 1942: The Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar). 1947: The Reserve Bank stopped acting as banker to the Government of Burma. 1948: The Reserve Bank stopped rendering central banking services to Pakistan. 1949: The Government of India nationalised the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.

RESERVE BANK OF INDIA

The central bank of the country--Reserve Bank of India (RBI). Established in April 1935 with a share capital of Rs. 5 cores On the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each Fully paid up which was entirely owned by private Shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalized in the year 1949 No of members on central board is 20 (incl. governor and 4 deputy governors)

FUNCTIONS OF RBI
Monetary policy. Regulation and supervision of the banking and nonbanking financial institutions, including credit information companies. Regulation of money, forex and government securities markets as also certain financial derivatives. Debt and cash management for Central and State

Governments.
Management of foreign exchange reserves.

FUNCTIONS OF RBI
Foreign exchange managementcurrent and capital account management. Banker to banks Banker to the Central and State Governments Oversight of the payment and settlement systems Currency management

Developmental role
Research and statistics

MONETARY POLICY
A

macroeconomic policy tool used to influence

interest rates, inflation, and credit availability through changes in the supply of money

available in the economy.

In

India it is also called the Reserve Bank of

Indias Credit Policy as the stress is primarily

on directing credit.

THE MAIN OBJECTIVES OF MONETARY POLICY IN INDIA ARE:

Maintaining price stability

Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth

Financial stability The relative emphasis among the objectives varies

from time to time, depending on evolving

macroeconomic developments.

CREDIT CONTROLS
There are two kinds of credit controls: Quantitative credit control control the volume of credit and inflation, indirectly. Qualitative tools credit controlthey control the supply of money in selective sectors of the

economy.

OBJECTIVES OF CREDIT CONTROLS

To

obtain stability in the internal price level. To attain stability in exchange rate. To stabilize money market of a country. To eliminate business cycles-inflation and depression-by controlling Supply of Credit: To maximize income, employment and output in a country. To meet the financial requirements of an economy not only during normal times but also during emergency or war.

Credit Control Measures

Quantitative
-Bank Rate -Open Mkt. Operations

Qualitative
-Marginal Requirement -Rationing of Credit

-Variation in CRR -SLR

-PLR

-Cost Credit Regulation -Issue of Directives

-Moral Suasion

-Publicity
-Direct Action

DIFFERENCE BETWEEN QUALITATIVE & QUANTITATIVE.

Quantitative

Qualitative

Total Volume or Quantity of Money It controls credit indirectly Lenders are controlled not the borrowers It is known as general credit control Instruments used are bank rate, open mkt. oprt., CRR etc

Quality or use or purpose of credit It controls credit directly Lenders and borrowers both are influenced It is known as selective credit control Instruments are variations in marg req, Consumer credit regl, direct action etc

QUANTITATIVE CREDIT
CONTROLS
1) Bank Rate .
2) Open Market Operation (OMO) .

3) Change in Cash Reserve Ratio (CRR).

4) Statutory Liquidity Ratio (SLR). 5) Repo and Reverse repo rate .

QUALITATIVE CREDIT
CONTROLS
Qualitative system instruments : 1)Selective credit control 2)Rationing of Credit 3) Moral Persuasion

4) Direct Action

SELECTIVE CREDIT CONTROL

Objective of these controls is to discourage some forms of activities while encouraging others. Such controls are used in respect of agriculture commodities, which are subject to speculative hoarding and wide price fluctuation. Ex:-Fixing of maximum limit to be advanced by banks to a particular. Some of the elative credit controls are as follows : (a) Differential Discount Rates : The reserve Bank fixes different discounting rates for the bills of different sectors. The sector for which more credit is to be made available the exchange bills rediscounted at a lower rate.

SELECTIVE CREDIT CONTROL

(b) Credit Authorization Scheme : This scheme was introduced with the objectives of enforce financial discipline on the larger borrowers and ensure that they did not pre-empt scare bank resources. Through this scheme, the RBI regulate not only the quantum but also the term of credit flows. Under this scheme, commercial banks are required to obtain RBIs permission before sanctioning any fresh credit of Rs. Six crores or more to any single borrower. This limit may be changed time by time

SELECTIVE CREDIT CONTROL

(c) Fixation of Margin : The commercial banks generally advance loans to their customers against some security or securities offered by the borrowers and acceptable to the banks. The commercial banks do not lend up to the full amount of the value of a security but lend an amount less than its value. (d) Reserve Bank can also instruct commercial banks charging discriminating rates of interest on certain types of advances. (e) Reserve Bank can ban on advances to specific sector to check inflationary pressures.

RATIONING OF CREDIT
1. In this method the RBI seeks to limit the maximum or ceiling of loans and advances and also in certain cases, fixes ceiling for specific categories of loans and advances. 2. If the rationing of credit is done with reference to the total

amount, it is a quantitative control, but if it is done with

reference to specific types of credit, it assumes a qualitative control.

3. Reserve Bank can also prescribe the minimum ratio

between capital and total assets

MORAL PERSUASION

Moral persuasion refers to those cases where the Reserve Bank endeavors to achieve its object by making suitable representations to the banking institutions concerned and relying on its moral influence and power of persuasion.

RBI can use its more pressure and persuade the commercial bank to follow its policy.

During inflationary conditions it may request the commercial

banks not to press for frequent loans, to refuse loans to the

customers and to refrain from investing funds in the unproductive or less productive occupations.

DIRECTIVE ACTION
Under Banking Regulations Act, the RBI is empowered to initiate direction action against those commercial banks which ignore its advice. In such cases RBI can impose restriction on sanctioning of loans and advances of concerned banks. Winding up of Bank of KARAD(Strong Scheduled Bank in Western Maharashtra) in 1992 because of financial irregularities and putting up of certain restrictions on the working of Metropolitan Cooperative Bank and these are the examples of direct action initiated by RBI.

PUBLICITY

The RBI may also follow the policy of publicity in order to make known to the public its views about the credit expansion or contraction.

It may issue warning to the people and commercial banks, substantiating its views by facts, figures and statements, through the media of publicity.

This method , however, is ineffective in the developing

economies where mass illiteracy exists and people do not understand the implications of the policy

OTHER FUNCTIONS
(i)Agriculture Credit :

All matters relating to agriculture credit are looked after by

RBI before the establishment of NABARD in1982. Now all

functions relating to agriculture and rural development are performed by NABARD.

(ii) Industrial Finance :

The RBI has contributed in the share capital of industrial finance institutions such as Industrial Finance Corporation of India, Industrial Development Bank of India, State Finance Corporations etc. Thus RBI indirectly contributes in the field of industrial finance.

OTHER FUNCTIONS
(iii)Publication of Data :

The RBI publishes statistics regarding money, price, finance etc, in its periodicals. This provides valuable information for Govt., business and industries. These information are helpful to take decisions. The important publications of RBI are the Reserve Bank of India Annual Report, currency and finance, trends and progress of Banking etc. At present, there are more than 100 publications of RBI.

OTHER FUNCTIONS
(iv)Banking Education and Training : The RBI has been organizing various education and training programs for bank employees and officers. Banker Training College Mumbai has been setup by RBI for the training of Bank officers. Other important training institutes such as College of Agriculture Banking (Pune), Reserve Bank staff Training College (Chennai) etc. had been setup by the RBI. RBI had also setup regional training centers at Mumbai , Kolkata, Chennai and Delhi.

OTHER FUNCTIONS
(v)Remitting Facility :Reserve Bank Provides remitting facilities to the central Government, state Government and semi-Government institutions free of cost. It also provides this facility to cooperative banks free of cost. (vi)Conversion of currency : The RBI converts spoiled currency in to fresh currency. It also provides facilities to convert currency notes into small denominating coins. (vii)To accept Deposits : The RBI accept deposits from Central and state Governments institution and individual persons without paying interest.

OTHER FUNCTIONS
(viii)Transactions with international institutions : All international economic transactions are being made through RBI. RBI opens its accounts in the central bank of member countries of IMF. It also deals with IMF, World Bank and other international financial institutions. (ix)Transactions in precious metals : In order to fulfill its obligations, RBI buys and sells precious metals, gold coins etc. RBI can borrow funds by mortgaging these precious metals.

OTHER FUNCTIONS
(x)Expansion of Banking facilities : RBI has played an important role in expansion of banking facilities in the rural areas of the country. At the end of June, 2001, there are 65,931 bank branches are situated in country, out of which more than half of the branches are situated in rural areas.

At the end of 2000, on an average there was only one

bank branches at a population of 5,000 in the country

CONCLUSION

Any way the credit controls are useful to understand the condition and it is easy to take decisions in order to control the inflation And their impact on the economic growth of country.

It also useful to accomplish the task of it`s kind and important at their concern of study.

QUESTIONS ?

THANK YOU