30

Published on November 2016 | Categories: Documents | Downloads: 69 | Comments: 0 | Views: 397
of 3
Download PDF   Embed   Report

Comments

Content

Cash Reserve Ratio (CRR) & statutory liquidity ratio (SLR) and an economy CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets & SLR is the percentage of its total deposits a bank has to keep in approved securities. The purpose of CRR & SLR is to keep a bank liquid a t any point of time. When banks have to keep low CRR or SLR, it increases the mo ney available for credit in the system. This eases the pressure on interest rate s & interest rates move down. Also when money is available & that too at lower i nterest rates, it is given on credit to the industrial sector which pushes the e conomic growth. Monetary Policy, CRR, SLR, M3 In a world of policies in the financial sector, nothing could get as alien as th e Monetary Policy. Terms like M3, CRR, SLR, PLR and OMO would make you think tha t the typical IT-bug has caught the financial sector. But take a closer look as the Monetary and Credit Policy is crucial to all of us and more so to the bankin g sector. For the uninitiated, this policy determines the supply of money in the economy a nd the rate of interest charged by banks. The policy also contains an economic o verview and presents future forecasts. Monetary Policy The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stab ility for the economy. These factors include - money supply, interest rates and the inflation. In banki ng and economic terms money supply is referred to as M3 - which indicates the le vel (stock) of legal currency in the economy. Besides, the RBI also announces norms for the banking and financial sector and t he institutions which are governed by it. These would be banks, financial instit utions, non-banking financial institutions, Nidhis and primary dealers (money ma rkets) and dealers in the foreign exchange (forex) market. Monetary Policy announced Historically, the Monetary Policy is announced twice a year - a slack season pol icy (April-September) and a busy season policy (October-March) in accordance wit h agricultural cycles. These cycles also coincide with the halves of the financi al year. Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take plac e later in the year. Monetary Policy different from the Fiscal Policy Two important tools of macroeconomic policy are Monetary Policy and Fiscal Polic y. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and econom ic growth. The Reserve Bank of India is responsible for formulating and implementing Moneta ry Policy. It can increase or decrease the supply of currency as well as interes

t rate, carry out open market operations, control credit and vary the reserve re quirements. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fisca l policy is a broader tool with the government. The Fiscal Policy can be used to overcome recession and control inflation. It ma y be defined as a deliberate change in government revenue and expenditure to inf luence the level of national output and prices. For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand. On the other hand, the government can reduce its expenditures or raise taxes dur ing inflationary times. Fiscal policy aims at changing aggregate demand by suita ble changes in government spending and taxes. The annual Union Budget showcases the government's Fiscal Policy. objectives of the Monetary Policy The objectives are to maintain price stability and ensure adequate flow of credi t to the productive sectors of the economy. Stability for the national currency (after looking at prevailing economic condit ions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial m arkets are also impacted through short-term implications. There are four main 'channels' which the RBI looks at: Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates). Interest rate channel. Exchange rate channel (linked to the currency). Asset price. All this is more linked to the banking sector. Monetary Policy impact the individual In recent years, the policy had gained in importance due to announcements in the interest rates. Earlier, depending on the rates announced by the RBI, the interest costs of bank s would immediately either increase or decrease. A reduction in interest rates would force banks to lower their lending rates and borrowing rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate of interest. On the other hand, if there were to be an increase in interest rates, banks woul d immediately increase their lending and borrowing rates. Since the rates of int erest affect the borrowing costs of corporates and as a result, their bottomline s (profits), the monetary policy is very important to them also. But over the past 2-3 years, RBI Governor Bimal Jalan has preferred not to wait for the Monetary Policy to announce a revision in interest rates and these revis ions have been when the situation arises. Since the financial sector reforms commenced, the RBI has moved towards a market -determined interest rate scenario. This means that banks are free to decide on interest rates on term deposits and loans. Being the central bank, however, the RBI would have a say and determine directio n on interest rates as it is an important tool to control inflation. The bank rate is a tool used by RBI for this purpose as it refinances banks at t he this rate. In other words, the bank rate is the rate at which banks borrow fr om the RBI. How was the scenario prior to recent liberalisation? Prior to recent liberalisation, the RBI resorted to direct instruments like inte rest rates regulation, selective credit control and CRR (cash reserve ratio) as

monetary instruments. One of the risks emerging in the past 5-7 years (through the capital flows and l iberalisation of the financial sector) is that potential risk has increased for institutions. Thus, financial stability has become crucial and there are concern s relating to credit flows to the agricultural sector and small-scale industries . What do the terms CRR and SLR mean? CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which bank s have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close