Monetary policy /Indian Economy – rlearn

Instrument Of Monetary Policy

Instruments of Credit Control credit control are of two Instruments of types:

A. Ouantitative Instruments:

1. Bank rate – It is the rate of interest at which RBI provides long-term loans to scheduled commercial banks without any approved securities. Rate as on August 2016 is 6.75 per cent, i.e. 50 basis points above the repo rate.

2.Liquidity adjustment facility (LAF): It is a monetary policy tool which allows banks to borrow money through repurchase agreements. It comprises following three:

(a) Repo rate (re-purchase option) – It is the rate of interest at which RBI provides short-term loans to scheduled commercial Banks against approved securities. Rate as on October 2016 is 6.25per cent.

(b) Reverse repo rate (RRR) – It is the rate of interest at which scheduled commercial banks deposits their surplus funds with RBI for a short period of time. The reverse repo rate is always 50 basis points, i.e., 0.5 per cent below the repo rate. Rate as on October 2016 is 5.75 per cent.

(c) Marginal standing facility(MSF): This facility came into effect from May, 2011.The banks that are eligible can avail an overnight short-term loan up to 1 per centof their net demand and time liabilities outstanding at the end of second preceding fortnight.

This facility is in addition to loans on repo rate.The minimum amount which can be accessed through MSF is Rs.l crore and in multiples of Rs.1 crore.

The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.

The rate of interest under MSF is 50 basis points(i.e., 0.5 per cent) above the repo rate for all scheduled commercial banks. MSF rate of interest as on October 2016 is 6.75 per cent.

Eligibility: All the Scheduled Commercial banks having current a/c in RBI.

3. Open Market Operations (OMO): These refer to the buying and selling of government securities (G-secs) in the open market (i.e., in the public) by the central bank. The central bank, by selling G-secs, reduces the money supply by withdrawing cash balances from within the economy controls, thereby controlling inflation.

4. Reserve Requirements: It comprises of the two –

a) Cash reserve ratio( CRR): It is the minimum percentage of a bank’s total demand and time liabilities that a scheduled commercial bank is obliged to deposit with the central bank (RBI)in the form of cash. Range of CRR is between 3 percent and 15 percent. Rate of CRR as on October,2016 is 4.00 percent.To check inflation or to decrease money supply the RBI increases CRR and vice-versa. It is maintained only on weekly basis (mainly on Friday).

(ii) Statutory liquidity ratio (SLR):lt is the percentage of the total demand and time liabilities (not more than 40per cent) of commercial banks that are to be kept with them only,in the form of- i) cash, i) Gold, ii)Approved Securities. Range of SLR is 15 to 40 percent. Rate of SLR as on October 2016 is 20.75 percent.

To reduce the inflation, RBI increase SLR and to increase economic growth RBI decrease SLR. Inflation and economic growth are directly proportional.

B. Qualitative instruments of Credit Control:

These instrumentsaid or restrict the flow of credit to specific areas of the economic activity. Some of them are:

1. Margin requirements: It refers to the amount of collateral security that a loanee is required to deposit with the commercial bank. This is the difference between the value of securities offered for loans and the value of loans granted.In order to decrease money supply, the margin requirement is increased by RBI and vice-versa.

2. Rationing of credit: It refers to the credit ceilings that can be granted by commercial banks being Controlled by RBI.

3. Moral (Per)suasion: RBI makes the banks adhere to the policy and directives through persuasion or pressure and to maintain a certain level of money supply in the economy.

4. Consumer credit regulation: RBI issues oral Written guidelines to the banks with regard to the down payments and maximum maturities of instalment credit for purchase of goods.