CHANGING ROLE OF

BANKING –MACRO VIEW

Mohan T
Retd AGM
Syndicatebank
Monetary Policy vs Fiscal Policy
• Monetary Policy –Central bank activities
that are directed towards influencing the
quantity of money and credit in the
economy.
• Fiscal Policy-Central Government s
decisions about taxation and spending .
• Both Monetary and Fiscal Policies are used
to regulate economic activity over time.
 Monetary Policy tools of RBI
There are two main kinds of monetary policy:
Contractionary and Expansionary
3 tools of monetary policy for managing the
money supply under Monetary Policy.
• Reserve requirement ( Reserve Ratio)
• Open market operations
• Discount rate(Bank Rate)
 Monetary Policy tools of RBI
Bank Rate :(Liquidity Adjustment )
• Central bank is the lender of last resort for
banks.
• Bank rate is the rate at which RBI lends to
other banks for short term without securities.
• By increasing this bank rate there will be
increase in the interest rates of banks which
will curtail the excessive loan growth.
• By decreasing bank rate money supply to
banks will increase and also more lending by
banks
 Monetary Policy tools of RBI
2.Open market Operations:
It refers to selling and purchasing of the
treasury bills and government securities by the
Central bank in order to regulate the money
supply in the economy. They inject directly
money into the economy or extract money
directly from the economy.
 Monetary Policy tools of RBI
3.Cash Reserve ratio : CRR
• It is the percentage of a bank s total deposits
that it needs to maintain as liquid cash
• This is RBI requirement and cash reserve is
kept with RBI.
• Bank does not earn interest on this liquid cash
maintained with RBI and also it can not use this
for investing and lending purposes
 Monetary Policy tools of RBI
4: Statutory Liquid ratio: SLR
RBI stipulates that banks have to invest a
portion of their demand and time liabilities in
the form of liquid assets like gold, treasury
bonds etc and the ratio of these liquid assets
to the demand and time liabilities of the bank
is called SLR.
Quantitative vs Qualitative credit
control tools of RBI
• Tools like Bank rate, Open market operations
and Cash reserve ratio regulates the liquidity
flow by increasing or decreasing the quantity
of money supply. These are called quantitate
tools.
• When RBI wants to focus on allocation of
credit to different sectors qualitative tools like
margin requirements, varying capital
requirement for certain sectors and moral
suasion are used.
 Objectives of Monetary Policy
1, Managing Inflation-low inflation conducive to
economy while high inflation is detrimental to
economy.
2.Reducing unemployment-increase money supply
during depression and recession while decrease
money supply during inflation
3.Balancing currency exchange rates-For promoting
international trade central banks regulate the
exchange rates of domestic and foreign currencies
QUERIES?

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