Economic Survey- Monetary and Financial Management

“RBI’s Role”
 C o n c e pt u a l C la r it y

W h a t i s M 0 , M 3 a n d M o n e y M u lt i p l i e r

W h at i s R e p o, R e v e r s e R e p o, M o n e ta r y
P o li c y Tra n s m i s s i o n

W h a t i s Va r i a b l e R a t e R e v e r s e R e p o
(VRRR)

W h a t i s S p e c i a l L o n g Te r m R e p o
O p e r a t i o n s ( S LT R O )

W h at i s G - S e c A c q u i s it i o n P r o g ra m m e ( G -
SA P)
 C o n c e pt s: W h a t i s M 0 , M 3 a n d M o n e y M u lt i p l i e r

M0 is also called as
“Reserve Money”
“high powered
money” “base money”
“central bank money”
 C o n c e pt s: W h a t i s M 0 , M 3 a n d M o n e y M u lt i p l i e r

M1 = Currency with the Public +

Demand Deposits with the Banking
System + 'Other' Deposits with the RBI

M2 = M1 + Time Liabilities Portion of

Savings Deposits with the Banking
System + Certificates of Deposit issued
by Banks + Term deposits upto 1 year

M3 = M2 + Term deposits over 1 year +

borrowings of Banks from financial
institutions
 C o n c e pt s: W h a t i s M 0 , M 3 a n d M o n e y M u lt i p l i e r

What is Money Multiplier?

Factory 81 810

The maximum amount of commercial Irrigation 90 900

bank money that can be created, given project
a certain amount of central bank money
Farmer 100 1000
A fall in money multiplier depicts a
weak credit creation process by the
banks.

When will a money multiplier fall?

When Banks park their funds with RBI
instead of lending them further
 C o n c e pt s: W h at i s R e p o, R e v e r s e R e p o, M o n e ta r y
P o li c y Tra n s m i s s i o n

Repo Reverse Repo

Bank has extra cash and

Bank wants immediate cash today. no one is borrowing it.
It goes to RBI and says, keep these G- It goes to RBI and says,
secs and give me cash. I will buy these keep this extra cash in
back tomorrow. exchange for G-secs.
RBI says, pay me 4% p.a for 1 day I will take these G-secs
tomorrow but I need
3.35%
RBI says, OK lets do this!
 C o n c e pt s: W h at i s R e p o, R e v e r s e R e p o, M o n e ta r y
P o li c y Tra n s m i s s i o n

Monetary Policy
Transmission

RBI reduces Policy Rates- Repo, Reverse WACR is the new operating target. What
Repo, does this mean?
CRR, SLR, MSF etc
Bank is SUPPOSED to pass on the The difference between WACR and repo
benefit to the customer. needs to be minimised. If it increases,
If it doesn’t, MPT is weak! RBI sucks liquidity to create a shortfall
of money in interbank call market so
Reasons for Good MPT? that WACR gets closer to repo.
1. External Benchmarking
2. Accommodative stance
3. Large surplus systemic liquidity

When GAP between call rate and repo

rate is minimum, the MPT improves
 C o n c e pt s: W h a t i s Va r i a b l e R a t e R e v e r s e R e p o
(VRRR)

What is VRRR Objective of VRRR?

After Covid, RBI infused

liquidity in the system Suck excessive liquidity from the system
through bond buying by offering a variable rate on reverse
programme repo

More liquidity ultimately

resulted in inflation numbers
going up. Hawkish stance by
developed countries.

To suck excessive liquidity, RBI

launched VRRR, where instead of
offering a fixed % to banks on
reverse repo, RBI said that the rate
can be determined by the market
 C o n c e pt s: W h a t i s S p e c i a l L o n g Te r m R e p o
O p e r a t i o n s ( S LT R O )

What is SLTRO

RBI lends at Repo rate to

banks for long term of 1-3
years.

Banks get long term funds at

a low rate. They are thus able
to lend at a low rate to
customers.
 C o n c e pt s: W h at i s G - S e c A c q u i s it i o n P r o g ra m m e ( G -
SA P)

What is G-SAP

Government needs money to

tackle Covid crisis

RBI says, let me get you

cheap money through G-SAP

RBI will buy G-secs and pay

them in cash. This increases
liquidity in the system

Side-effects – More liquidity Side-effects – After a point, yield on

means less value of rupee. Government bonds starts rising. This
Depreciation of currency means rise in all corporate bond yields.
The cost of borrowing goes up for
corporates.
 W H Y D I D R B I r e d u c e P O L I C Y R A T E S a f t e r C o v i d ? W h a t ’s
A c c o m m o d at i v e S ta n c e ?

Accommodative Stance RBI Expects focus to remain on Growth,

Inflation to stay in Range, policy rates
to either reduce or stay the same

Advantage of Signal to the market that rates will not

Accommodative Stance increase in near future. Borrow and
Invest!

FIIs and FDIs gain with higher Growth.

Inflation is harmful for their
Investments.
 W H Y D I D R B I r e d u c e P O L I C Y R A T E S a f t e r C o v i d ? W h a t ’s
A c c o m m o d at i v e S ta n c e ?

Accommodative Stance RBI Expects focus to remain on Growth,

Inflation to stay in Range, policy rates
to either reduce or stay the same

Advantage of Signal to the market that rates will not

Accommodative Stance increase in near future. Borrow and
Invest!

FIIs and FDIs gain with higher Growth.

Inflation is harmful for their
Investments.
 W H Y D I D R B I r e d u c e P O L I C Y R A T E S a f t e r C o v i d ? W h a t ’s
A c c o m m o d at i v e S ta n c e ?

Post Covid All Industries stopped working. High

Unemployment.

A sudden surge in demand as country

opened up

Supply not enough to meet the demand-

risk of INFLATION due to supply
demand gap

RBI’s push to industries to borrow at

CHEAP RATES, invest and produce
goods. Dual purpose of controlling
inflation and increasing growth.
 O t h e r m e a s u r e s b y R B I to i n c r e a s e L i q u i d it y i n t h e
S y ste m ?

Post Covid Reduction in policy rates

Special Refinance Facility to NABARD,

NHB, SIDBI so that they can lend more

Term liquidity to healthcare

Special LTRO for small finance banks

On Tap Targeted LTRO

G-SAP
 Ta c k l i n g N P A s - N a t i o n a l A s s e t R e c o n s t r u c t i o n C o m p a n y
L i m ite d

What is NARCL and Present ARCs acquire smaller value loans due to low
WHY? capitalization, low recoveries from existing portfolio

NARCL to acquire major high value NPAs of Banks.

NARCL to be owned by PSBs.

Capitalisation of NARCL- Equity and Debt from Banks

Acquisition of stressed assets on 15:85 basis- 15% paid

in cash to the NPA holder bank and 85% in securities of
NARCL created for that NPA

Security receipts of NARCL backed by Government. The

Government will cover gap between fae value of SR and
actual realization.
 DICGC

DICGC Amendment Act DICGC covers all banks- payment banks, SFBs, RRBs,
2021 foreign bank branches, LABs, Cooperative Banks

Insurance premium of DICGC cannot be recovered from

Customers

DICGC insurance amount- Rs 5 lakh

98% of all accounts are protected under DICGC

50% of total deposits are insured by DICGC

DICGC Amendment Act introduced Interim payments to

customers of those banks on whom moratorium is
imposed by RBI