Main Activities of the RBI
v Monetary
Authority
v Issuer
of Currency
v Banker
and Debt Manager to Government
v Banker
to Banks
v Regulator
of the Banking System
v Manager
of Foreign Exchange
v Maintaining
Financial Stability
v Regulator
and Supervisor of the Payment and Settlement Systems
v Developmental
Role
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 goal: achieving
specific economic objectives, such as low and stable inflation and promoting
growth.
The main objectives of
monetary policy in India are:
ü Maintaining
price stability
ü Ensuring
adequate flow of credit to the productive sectors of the economy to support
economic growth
ü Financial
stability
RBI monitor and analyse
the movement of a number of indicators including interest rates, inflation
rate, money supply, credit, exchange rate, trade, capital flows and fiscal
position, along with trends in output as we develop our policy perspectives.
The Reserve Bank’s Monetary
Policy Department (MPD) formulates monetary policy. The Financial Markets
Department (FMD) handles day-to-day liquidity management operations. There are
several direct and indirect instruments that are used in the formulation and
implementation of monetary policy.
Direct
Instruments
Cash Reserve Ratio (CRR): The share of net demand and time liabilities that
banks must maintain as cash balance with the Reserve Bank. (OR The
Reserve Bank requires banks to maintain a certain amount of cash in reserve as
a percentage of their deposits to ensure that banks have sufficient cash to
cover customer withdrawals.)
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.
Indirect
Instruments
Liquidity
Adjustment Facility (LAF): Consists of 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.
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.
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.
Marginal
Standing Facility (MSF): was instituted under which
scheduled commercial banks can borrow over night at their discretion up to one
per cent of their respective NDTL at 100 basis points above the repo rate to
provide a safety valve against unanticipated liquidity shocks
Bank Rate:
It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. It also signals the medium-term stance of
monetary policy.
Market
Stabilisation Scheme (MSS):
This 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.
The Reserve Bank’s
Annual Policy Statements, announced in April, are followed by three quarterly reviews,
in July, October and January. A detailed background report — Review of
Macroeconomic and Monetary Developments — is released the day before each of
these policy reviews. In between the quarterly’s, RBI also release three
mid-quarter statements in September, December and March reviewing the policy.
To be Continued.............
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