A Presentation on “ RBI POLICY ” Presented By: DRIPAL PATEL-5188 KINJAL MAKWANA-5022 HELLY MODI-5026 AASHAL SHAH-5054 CHARMI SHAH-5057 SONU SHAH-5064 PRESENTED IN CLASS OF: ABHINAV KAPDIYA GROUP NO. :- 9

Flow of presentation  Introduction.  History.  Functions.  Roles of RBI.  Credit Creation.  Fiscal Policy.  Monetary Policy

INTRODUCTION TO RBI  Established in April 1935 under the RESERVE BANK OF INDIAN ACT  Head Quarters – MUMBAI (Maharashtra).  The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$ billion (2010) of currency reserves.  Present Governor – D. Subbarao.

History Of RBI  It was set up on the recommendations of Hilton Young Commission  It was started as share-holders bank with a paid up capital of 5 crores  Initially it was located in Kolkata  It moved to Mumbai in 1937  Initially it was privately owned

Continue…  Since 1949, the RBI is fully owned by the Government of India.  Its First governor was Sir Osborne A.Smith  The First Indian Governor was “Sir Chintaman D.Deshmukh

MAIN FUNCTIONS Monetary authority Manager of exchange controlIssuer of currency Minimum Reserve System - Principle of Currency Note Issue Developmental roleRelated functions

Roles of RBI  Development of banking system  Development of financial institutions  Development of backward areas  Economic stability  Economic growth  Proper interest rate structure

Credit creation  The most important function of the central bank is to control credit by commercial banks.  Money and credit represent a powerful force for good evil in the economy.  Money cannot manage itself. So it is the duty of the central bank to ensure that money and credit is properly managed so that inflation and deflationary pressures can be controlled in the economy.  In modern times bank credit has become the important source of money and commercial have unlimited power to expand or contract credit.

Continue…  Methods of credit control are broadly divided into two:  Quantitative credit control methods  Qualitative or selective credit control methods

FISCAL POLICY  Fiscal Policy is that part of Govt. policy which is concerned with raising revenue through taxation and other means and deciding on the level and pattern of expenditure.  The Fiscal Policy operates through the budget.  Budget is an estimate of govt. expenditure and revenue for the ensuing financial year.

Continue…  In broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government.

Main Objectives of Fiscal Policy In India  Development by effective Mobilization of Resources Efficient allocation of Financial Resources  Reduction in inequalities of Income and Wealth  Price Stability and Control of Inflation  Employment Generation  Balanced Regional Development  Reducing the Deficit in the Balance of Payment  Increasing National Income  Foreign Exchange Earnings

Types of fiscal policy  Discretionary Fiscal Policy  Expansionary Fiscal Policy  Contractionary Fiscal Policy

Expansionary Fiscal Policy  Expansionary fiscal policy uses increased government spending, reduced taxes or a combination of the two.  The chief objective of a fiscal expansion is to increase aggregate demand for goods and services across the economy, as well as to reduce unemployment. Continue…

Contractionary Fiscal Policy  When government policy-makers cut spending or increase taxes, they engage in contractionary fiscal policy. Governments may enact contractionary measures to slow an economic expansion and prevent inflation..  In addition, governments may enact contractionary policy for ideological reasons. These include reducing the overall size and scope of government activity or lowering budget deficits, in which the government spends more money than it collects. Continue…

Discretionary fiscal policy  Discretionary fiscal policy is the portion of the Federal government's actions that can be changed year to year by Congress and the President. It is usually executed through each year's budget or through changes in the tax code.fiscal policy Continue…

Measures of fiscal policy  Fiscal policy is the policy under which the government of a country uses fiscal measures (or instruments) to correct excess demand and deficient demand and to achieve other desirable objectives. There are mainly three types of fiscal measures, viz. A) Taxes B) Public expenditure C) public borrowing

Taxes  Excess of aggregate demand over aggregates supply is caused due to the excess amount of money income is the hands of the people in relation to the available output in the country.  In order to correct such situation personal disposable should be reduced. Therefore, government should increase the rate of personal income tax, and corporate income tax so that people will have less money in their hands and aggregates demand will fall. Continue…

Public expenditure  Public expenditure is an important component of aggregate demand. Therefore, excess demand can be corrected by reducing government expenditure.  On the other hand, government should increase expenditure on public works programmers.  Besides, government should also enhance expenditure on social security measures, like old age pensions, unemployment allowances, sickness benefits etc. Continue…

Public borrowing  Like tax and public expenditure, public borrowing is also an important anti – inflationary instrument. Government of a country should resort to borrowing from the non-bank public to keep less money in their hands for correcting the state of excess demand and inflationary situation.  On the other hand, to correct deficient demand, government should reduce borrowing from the general public so that purchasing power in the hands of the people is not reduced Continue…

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 stability for the economy.  This include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M1, M2, M3 and M4 - which indicates the level (stock) of legal currency in the economy.  Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it.

Measures of Money Stock RBI employs 4 measures of money stock:-  M1:The measure of money stock designated by M1 is usually described as the money supply.  M2:M1+Post office Savings Bank Deposits.  M3:M1+Time Deposits with Banks.  M4:M3+total Post Office Deposits.

Objectives of Monetary Policy  The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.  Stability for the national currency (after looking at prevailing economic conditions)  growth in employment and income are also looked into.  The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.

Instruments of Monetary Policy  Bank Rate of Interest  Cash Reserve Ratio  Statutory Liquidity Ratio  Open market Operations  Margin Requirements  Deficit Financing  Issue of New Currency  Credit Control

 It is the interest rate which is fixed by the RBI to control the lending capacity of Commercial banks.  During Inflation, RBI increases the bank rate of interest due to which borrowing power of commercial banks reduces which thereby reduces the supply of money or credit in the economy.  When Money supply Reduces it reduces the purchasing power and thereby curtailing Consumption and lowering Prices. Continue… Bank Rate of Interest

 CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI.  During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits 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. Continue… Cash Reserve Ratio

 Banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.  If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy. Continue… Statutory Liquidity Ratio

 It refers to the buying and selling of Govt. securities in the open market.  During inflation RBI sells securities in the open market which leads to transfer of money to RBI. Thus money supply is controlled in the economy. Continue… Open Market Operations

 It means printing of new currency notes by Reserve Bank of India.If more new notes are printed it will increase the supply of money thereby increasing demand and prices.  Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation. Continue… Deficit Financing

 During Inflation the RBI will issue new currency notes replacing many old notes.  This will reduce the supply of money in the economy. Continue… Issue of New Currency

 Repo rate is the interest rate at which the central bank lends funds to banks against pledging securities.  If the 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. Repo rate

 The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate.  If the reverse repo rate is increased, it means the RBI will borrow money from the bank. This helps stem the flow of excess money into the economy.  Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected. Reverse Repo rate

 The interest rate that commercial banks charge their best, most credit-worthy customers.  The rate tends to become standard across the banking industry.  Many consumer loans, such as home equity, automobile, mortgage, and credit card loans, are tied to the prime rate. Prime lending rate

Base Rate  It is the minimum rate of interest that a bank is allowed to charge from its customers.  Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than BR to any of its customers. Base Rate System is for the banks to set a level of minimum interest rates charged while giving out the loans. Base rate

Call rate  It is Short term Inter bank rate.Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement.  Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis. Call rate

 The main objective is to check speculation and rising prices. The RBI issues directives to banks relating to the purpose for which advances may or may not be made.  The margins to be maintained in respect of secured advances.  Credit Controls Specifies minimum margins for lending against specific securities. Ceiling on amt of credit for certain purposes to stem the flow of credit to speculative and non productive sectors Credit control

Policy rates and reserve ratios  Policy rates, Reserve ratios, lending, and deposit rates as of 19, March, 2013 Bank Rate8.50%(19/3/2013) Repo Rate7.50% Reverse Repo Rate6.50% Cash Reserve Ratio (CRR)4% Statutory Liquidity Ratio (SLR)23.0% Base Rate9.75%–10.50% Deposit Rate8.50%–9.00% Inflation4.25%

Difference Between Monetary Policy & Fiscal Policy  The Fiscal policy decisions are set by the National Govt. where as Monetary Policy is being implemented by the central bank i.e. the RBI.  Fiscal policy deals in govt. spending and revenue collection by the way of tax. Whereas Monetary Policy is a process which controls the demand and supply of money.  Fiscal policy relates to the economic position of a nation. Monetary policy focuses on the strategy of banks.

Continue…  Fiscal policy administers the taxation structure of the nation. Monetary Policy helps to stabilize the economy of the country.  Fiscal policy speaks of the government’s economic program. Monetary policy sets the program of all commercial banks of the nation.

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