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Rbi'S Policy With Price Rise - Policy & Implications
Rbi'S Policy With Price Rise - Policy & Implications
RBI
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act,1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
Monetary Authority
Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.
The main objectives of monetary policy in India are: 1-Maintaining price stability 2- Ensuring adequate flow of credit to the productive 3-sectors of the economy to support economic growth 4- Financial stability
Direct Instruments
Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Refinance facilities
Indirect Instruments
Liquidity Adjustment Facility (LAF) Open Market Operations (OMO) Market Stabilisation Scheme (MSS) Repo/reverse repo rate Bank rate
and time liabilities that banks must maintain as cash balance with the Reserve Bank. Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as, government securities, cash and gold. Refinance facilities: Sector-specific refinance facilities (e.g., against lending to export sector)provided to banks.
daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection)and reverse repo (liquidity absorption) auction operations, using government securities as collateral. Open Market Operations (OMO): Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.
instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills. The mobilised cash is held in a separate government account with the Reserve Bank. Repo/reverse repo rate: These rates under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in other segments of the financial market and the real economy.
bank recieves Rs 100 as deposit ,then they can lend Rs.90 as a loan & will have to keep the balance Rs 10 in the customers deposit A/c. Now,the borrower who has received Rs.90 as a loan will deposit the same in his bank. The borrowers bank will now lend out Rs.81 (Rs 90 X 90% ) & keep Rs 9 in his deposit A/c. As this process continues the banking system can expand the initial deposits of Rs 100 into a maximum of Rs 1000 (Rs. 100+Rs. 90+Rs 81=Rs 1000)
the money available for lending. Every time the borrowed money comes into a deposit A/c of a customer , the bank has to compulsorily keep a part of it reserves. This reduces credit expansion by controlling the amt. of money that goes out by the way of loans. This directly effects money creation process & in turn affects the economic activity.
LATEST RATES..
1. CRR 6 %
2. SLR 25 % 3. REPO RATE 6.25 %
PRICE SITUATION
PRICE SITUATION(contd.)
During August-September 2010,international
commodity prices increased again on account of the supply disruptions in many commodities.
Commodity prices earlier recorded some decline
during May-June 2010, as concerns over euro area recovery and sustainability of high growth in demand in emerging economies spilled over to commodity markets.
near zero/very low Price Situation levels as the concerns on sustainability of recovery became more prominent in the second quarter of 2010-11.
decided to reduce the policy rate. Israel and Canada, on the other hand, increased their policy rates in Q2 of 2010-11, recognising the inflation risks going forward.
(contd.)
Among the emerging economies, China and Thailand
raised their policy rates during Q2 of 2010-11 while South Africa reduced it.
November 2009 to reach 11.0 per cent (year-on-year) by April 2010 and remained elevated in the first quarter of 2010-11.
During May-August 2010, however, some moderation
in inflation was visible, indicating that inflation might have peaked off (8.6 percent provisional in September 2010 as per the new series of WPI with base ( 200405=100).
and the reverse repo rates were raised by 50 basis points and 75 basis points, respectively, in two stages in July 2010 .
with the public operating as the major drains on liquidity during the second quarter of 2010-11, when compared with the situation prevailing at the end of the first quarter, variations in both currency and government surplus had a positive contribution to autonomous liquidity in the system.
of government securities by SCBs not only because of the higher growth of non-food credit, but also because banks tapped the repo window under the LAF for their liquidity needs, leading to gradual decline in SLR maintenance (Chart IV.2). The excess SLR investments of SCBs amounted to `1,86,097 crore in early October 2010.
Conclusion
From various monetary, fiscal and other
measures it becomes clear that to control inflation government should adopt all measures simultaneously. That the success of the fiscal measures to control inflation needs a matching demand-supply equation is vindicated by Indias failure to check price rise in 2010. RBI has hiked policy rates repeatedly during the last two years, but prices, especially food prices, have gone on increasing unchecked as demand has continued to outpace supply.