M.D.

COLLEGE ECONOMICS

RESERVE BANK OF INDIA

The ‘Reserve Bank of India’ is the central bank of India,
and was established on ‘April 1, 1935’ in accordance with
the provisions of the Reserve Bank of India Act, 1934. The
Central Office of the Reserve Bank was initially established
in Calcutta but was permanently moved to Mumbai in 1937.
Though originally privately owned, RBI has been fully
owned by the Government of India since nationalization in
1949.

‘Duvvuri Subbarao’ who succeeded ‘Yaga Venugopal

Reddy’ on September 2, 2008 is the current Governor of RBI.

The Reserve Bank of India was set up on the

recommendations of the Hilton Young Commission. The
commission submitted its report in the year 1926, though
the bank was not set up for nine years.

The Preamble of the Reserve Bank of India describes

the basic functions of the Reserve Bank as to regulate the
issue of Bank Notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate
the currency and credit system of the country to its
advantage.

It has 22 regional offices, most of them in state capitals.

M.D.COLLEGE ECONOMICS

Main objectives of RBI:-

Monetary authority:-

 Formulates, implements and monitors the Monetary

Policy, announced twice a year.
 Announces the Credit Policy, announced twice a year -
in April it announces new policy initiatives, the October
pronouncement is a review of the April policy. [1]
 Objective: Maintaining price stability and ensuring
adequate flow of credit to productive sectors.
 Maintain optimum Liquidity in the economy.

System of Note issue:-

 RBI Maintains Minimum Reserve System for Note

issue.

(This means that RBI can issue any amount of currency

notes provided it keeps the minimum statutory limit of Rs.1
crore billion crores worth Gold and Securities.)

Regulator and supervisor of the financial system:-

 Prescribes broad parameters of banking operations
within which the country's banking and financial
system functions.
 Objective: maintain public confidence in the system,
protect depositors' interest and provide cost-effective
banking services to the public.

Manager of exchange control:-

 Manages the Foreign Exchange Management Act, 1999.

M.D.COLLEGE ECONOMICS

 Objective: to facilitate external trade and payment and

promote orderly development and maintenance of
foreign exchange market in India.

Issuer of currency:-

 Issues and exchanges or destroys currency and coins

not fit for circulation.
 Objective: the main objective is to give the public
adequate supply of currency of good quality and to
provide loans to commercial banks to maintain or
improve the GDP.

(The basic objectives of RBI are to issue bank notes, to

maintain the currency and credit system of the country to
utilize it in its best advantage, and to maintain the reserves.
RBI maintains the economic structure of the country so that
it can achieve the objective of price stability as well as
economic development, because both objectives are
diverse in themselves.)

Developmental role:-

 Performs a wide range of promotional functions to

support national objectives.
 To incubate or establish financial institutions of
national importance, for e.g.: NABARD, IDBI, ICICI.
M.D.COLLEGE ECONOMICS

INTRODUCTION:-
The Reserve Bank of India will announce its Monetary
and Credit Policy for the first half of the financial year 2002-
03 on April 29. Even as RBI ‘Governor Bimal Jalan’ puts the
finishing touches to the document, have you ever
considered what is the significance of the biannual
exercise?

In a world of policies in the financial sector, nothing could

get as alien as the Monetary Policy. Terms like M3, CRR,
SLR, PLR and OMO would make you think that the typical
IT-bug has caught the financial sector. But take a closer
look as the Monetary and Credit Policy is crucial to all of us
and more so to the banking sector.

For the uninitiated, this policy determines the supply of

money in the economy and the rate of interest charged by
banks. The policy also contains an economic overview and
presents future forecasts. The Monetary and Credit Policy is
the policy statement, traditionally announced twice a year,
through which the Reserve Bank of India seeks to ensure
price stability for the economy.

These factors include - money supply, interest rates and the

inflation. In banking and economic terms money supply is
referred to as M3 - which indicates the level (stock) of legal
currency in the economy.

Besides, the RBI also announces norms for the banking and
financial sector and the institutions which are governed by
it. These would be banks, financial institutions, non-banking
financial institutions, Nidhis and primary dealers (money
markets) and dealers in the foreign exchange (forex) market.
M.D.COLLEGE ECONOMICS

WHEN IS MONETARY POLICY

ANNOUNCED?

Historically, the Monetary Policy is announced

twice a year - a slack season policy (April-September)
and a busy season policy (October-March) in
accordance with agricultural cycles. These cycles also
coincide with the halves of the financial year.

Initially, the Reserve Bank of India announced all its

monetary measures twice a year in the Monetary and
Credit Policy. The Monetary Policy has become dynamic
in nature as RBI reserves its right to alter it from time to
time, depending on the state of the economy.

However, with the share of credit to agriculture coming

down and credit towards the industry being granted
whole year around, the RBI since 1998-99 has moved in
for just one policy in April-end. However a review of the
policy does take place later in the year.
M.D.COLLEGE ECONOMICS

DIFFERNCE BETWEEN MONETARY

POLICY AND FISCAL POLICY:-

Two important tools of macroeconomic policy are

Monetary Policy and Fiscal Policy.

The Monetary Policy regulates the supply of money and the

cost and availability of credit in the economy. It deals with
both the lending and borrowing rates of interest for
commercial banks.

The Monetary Policy aims to maintain price stability, full

employment and economic growth.

The Reserve Bank of India is responsible for formulating

and implementing Monetary Policy. It can increase or
decrease the supply of currency as well as interest rate,
carry out open market operations, control credit and vary
the reserve requirements.

The Monetary Policy is different from Fiscal Policy as the

former brings about a change in the economy by changing
money supply and interest rate, whereas fiscal policy is a
broader tool with the government.

The Fiscal Policy can be used to overcome recession and

control inflation. It may be defined as a deliberate change in
government revenue and expenditure to influence the level
of national output and prices.

For instance, at the time of recession the government can

increase expenditures or cut taxes in order to generate
demand.
M.D.COLLEGE ECONOMICS

On the other hand, the government can reduce its

expenditures or raise taxes during inflationary times. Fiscal
policy aims at changing aggregate demand by suitable
changes in government spending and taxes.

The annual Union Budget showcases the government's

Fiscal Policy.
M.D.COLLEGE ECONOMICS

OBJECTIVES OF MONETARY
POLICY:-

The objectives are to maintain price stability and

ensure adequate flow of credit to the productive sectors of
the economy.

Stability for the national currency (after looking at prevailing

economic conditions), growth in employment and income
are also looked into. The monetary policy affects the real
sector through long and variable periods while the financial
markets are also impacted through short-term implications.

There are four main 'channels' which the RBI looks at:

 Quantum channel: money supply and credit (affects

real output and price level through changes in reserves
money, money supply and credit aggregates).
 Interest rate channel.
 Exchange rate channel (linked to the currency).
 Asset price.
M.D.COLLEGE ECONOMICS

IMPACT OF MONETARY POLICY ON

INDIVIUALS:-

In recent years, the policy had gained in importance

due to announcements in the interest rates.

Earlier, depending on the rates announced by the RBI, the

interest costs of banks would immediately either increase or
decrease.

A reduction in interest rates would force banks to lower

their lending rates and borrowing rates. So if you want to
place a deposit with a bank or take a loan, it would offer it at
a lower rate of interest.

On the other hand, if there were to be an increase in interest

rates, banks would immediately increase their lending and
borrowing rates. Since the rates of interest affect the
borrowing costs of corporates and as a result, their
bottomlines (profits), the monetary policy is very important
to them also.

But over the past 2-3 years, RBI Governor Bimal Jalan has
preferred not to wait for the Monetary Policy to announce a
revision in interest rates and these revisions have been
when the situation arises.

Since the financial sector reforms commenced, the RBI has

moved towards a market-determined interest rate scenario.
This means that banks are free to decide on interest rates
on term deposits and loans.
M.D.COLLEGE ECONOMICS

Being the central bank, however, the RBI would have a say
and determine direction on interest rates as it is an
important tool to control inflation.

The bank rate is a tool used by RBI for this purpose as it

refinances banks at the this rate. In other words, the bank
rate is the rate at which banks borrow from the RBI.
M.D.COLLEGE ECONOMICS

IMPORTANT TERMS OF MONETARY

POLICY:-

CRR & SLR:-

CRR, or cash reserve ratio, refers to a portion of deposits
(as cash) which banks have to keep/maintain with the RBI.
This serves two purposes. It ensures that a portion of bank
deposits is totally risk-free and secondly it enables that RBI
control liquidity in the system, and thereby, inflation.

Besides the CRR, banks are required to invest a portion of

their deposits in government securities as a part of their
statutory liquidity ratio (SLR) requirements.

The government securities (also known as gilt-edged

securities or gilts) are bonds issued by the Central
government to meet its revenue requirements. Although the
bonds are long-term in nature, they are liquid as they can be
traded in the secondary market.

Since 1991, as the economy has recovered and sector

reforms increased, the CRR has fallen from 15 per cent in
March 1991 to 5.5 per cent in December 2001. The SLR has
fallen from 38.5 per cent to 25 per cent over the past decade.

Bank Rate:-
Bank rate is the minimum rate at which the central bank
provides loans to the commercial banks. It is also called the
discount rate.
M.D.COLLEGE ECONOMICS

Usually, an increase in bank rate results in commercial

banks increasing their lending rates. Changes in bank rate
affect credit creation by banks through altering the cost of
credit.

Repo Rate:-
A repurchase agreement or ready forward deal is a secured
short-term (usually 15 days) loan by one bank to another
against government securities.

Legally, the borrower sells the securities to the lending bank

for cash, with the stipulation that at the end of the
borrowing term, it will buy back the securities at a slightly
higher price, the difference in price representing the
interest.

Open Market Operations:-

An important instrument of credit control, the Reserve Bank
of India purchases and sells securities in open market
operations.

In times of inflation, RBI sells securities to mop up the

excess money in the market. Similarly, to increase the
supply of money, RBI purchases securities.
M.D.COLLEGE ECONOMICS

RBI GOVERNOR Presents Third

Quarter Review of Annual Statement
on Monetary Policy for 2007-08
Highlights

 Bank rate, Repo rate, Reverse repo rate, Csh Reserve

ratio
(CRR) kept unchanged.
 The flexibility to conduct overnight and long-term repo,
including the right to accept or reject tenders under the
liquidity adjustment facility (LAF), wholly or partially is
retained.
 Overall real GDP growth projection for 2007-08 at
around 8.5% is retained.
 The policy endeavours would be to contain
inflationcloses to 5.0% in 2007-08 while conditioning
expenses in the range of 4.0 - 4.5%.
 While non-food credit has decelerated, growth in
money supply and aggregate deposits of scheduled
commercial banks continue to expand well above
indicative projections.
 High growth in reserve money is driven by large
accretion to RBI’s net foreign exchange assets.
 Liquidity management will assume priority in the
conduct of monetary policy through appropriate and
timely action.
 Barring the emergence of any adverse and unexpected
developments in various sectors of the economy and
keeping in view the current assessment of the
economy including the outlook for growth and
M.D.COLLEGE ECONOMICS

inflation, the overall stance of monetary policy in the

period ahead will broadly continue to be:

 To reinforce the emphasis on price stability and

well-anchored inflation expectations while
ensuring a monetary and interest rate
environment conducive to continuation of the
growth momentum and orderly conditions in
financial markets.
 To emphasise credit quality as well as credit
delivery, in particular, for employment-intensive
sectors, while pursuing financial inclusions.
 To monitor the evolving heightened global
uncertainties and domestic situation impinging on
inflation expectations, financial stability and
growth momentum in order to respond swiftly
with both conventional and unconventional
measures, as appropriate.

Monetary Measures taken by RBI:-

 Bank Rate kept unchanged at 6.0 per cent.
 The reverse repo rate and the repo rate under the LAF
are kept unchanged at 6.0 per cent and 7.75 per cent,
respectively.
 The Reserve Bank retains the option to conduct overnight
or longer term repo/reverse repo under the LAF
depending on market conditions and other relevant
factors. The Reserve Bank will continue to use this
flexibility including the right to accept or reject tender(s)
under the LAF, wholly or partially, if deemed fit, so as to
make efficient use of the LAF in daily liquidity
management.
 CRR kept unchanged at 7.5 per cent.
M.D.COLLEGE ECONOMICS

The Annual Policy Statement for the year 2008-09 will be

announced on April 29, 2008.

HIGHLIGHTS OF THE POLICY2008-09

 High priority to price stability, well-anchored inflation

expectations and orderly conditions in financial
markets while sustaining the growth momentum.
 Swift response on a continuous basis to evolving
adverse international and domestic developments
through both conventional and unconventional
measures.
 Emphasis on credit quality and credit delivery while
pursuing financial inclusion.
 Bank Rate, Reverse Repo Rate and Repo Rate kept
unchanged.
 Scheduled banks required to maintain CRR of 8.25 per
cent with effect from the fortnight beginning May 24,
2008.
 GDP growth projection for 2008-09 in the range of 8.0-
8.5 per cent.
 Inflation to be brought down to around 5.5 per cent in
2008-09 with a preference for bringing it close to 5.0
per cent as soon as possible. Going forward, the
resolve is to condition policy and perceptions for
inflation in the range of 4.0-4.5 per cent so that an
inflation rate of around 3.0 per cent becomes a
medium-term objective.
 M3 expansion to be moderated in the range of 16.5-17.0
per cent during 2008-09.
 Deposits projected to increase by around 17.0 per cent
or Rs.5,50,000 crore during 2008-09.
 Adjusted non-food credit projected to increase by
around 20.0 per cent during 2008-09.
M.D.COLLEGE ECONOMICS

 Introduction of STRIPS in Government securities by

the end of 2008-09.
 A clearing and settlement arrangement for OTC rupee
derivatives proposed.
 Domestic crude oil refining companies would be
permitted to hedge their commodity price risk on
overseas exchanges/markets on domestic purchase of
crude oil and sale of petroleum products based on
underlying contract.
 Currency futures to be introduced in eligible
exchanges in consultation with the SEBI; broad
framework to be finalised by May 2008.
 Indian companies to be allowed to invest overseas in
energy and natural resources sectors.
 Reserve Bank can be approached for capitalisation of
export proceeds beyond the prescribed period of
realisation.
 Loans granted to RRBs for on-lending to agriculture
and allied activities to be classified as indirect finance
to agriculture.
 The shortfall in lending to weaker sections would be
taken into account for contribution to RIDF with effect
from April 2009.
 RRBs allowed to sell loan assets to other banks in
excess of their prescribed priority sector exposure.
 The Reserve Bank to disseminate details of various
charges levied by banks.
 Asset classification norms for credit to infrastructure
projects relaxed.
 The prudential guidelines for specific off-balance sheet
exposures of banks to be reviewed.
 Reserve Bank to carry out supervisory review of banks'
exposure to the commodity sector.
M.D.COLLEGE ECONOMICS

STANCE OF THE MONETARY

POLICY OF 2008-09

 For policy purposes, real GDP growth in 2008-09 may

be placed in the range of 8.0 to 8.5 per cent, assuming
that (a) global financial and commodity markets and
real economy will be broadly aligned with the central
scenario as currently assessed and (b) domestically,
normal monsoon conditions prevail.
 In view of the lagged and cumulative effects of
monetary policy on aggregate demand and assuming
that supply management would be conducive, the
policy endeavour would be to bring down inflation from
the current high level of above 7.0 per cent to around
5.5 per cent in 2008-09 with a preference for bringing it
as close to 5.0 per cent as soon as possible.
 In view of the monetary overhang, it is necessary to
moderate monetary expansion and plan for a rate of
money supply in the range of 16.5-17.0 per cent in
2008-09 in consonance with the outlook on growth and
inflation so as to ensure macroeconomic and financial
stability in the period ahead.
 Consistent with the projections of money supply, the
growth in aggregate deposits in 2008-09 is placed at
around 17.0 per cent or around Rs.5,50,000 crore.
 Based on an overall assessment of the sources of
funding and the overall credit requirements of the
various productive sectors of the economy, the growth
of non-food credit including investments in
bonds/debentures/shares of public sector
undertakings and private corporate sector and
commercial paper (CP) is placed at around 20.0 per
cent in 2008-09.
M.D.COLLEGE ECONOMICS

 Given the unprecedented complexities involved and

the heightened uncertainties at this juncture, there
are some key factors that govern the setting of the
stance of monetary policy for 2008-09 viz., (i) the
challenge of escalated and volatile food and energy
prices; (ii) even as investment demand remains
strong, supply elasticities are expected to improve
further; (iii) recent initiatives in regard to supply-
management by the Government of India and
measures relating to the cash reserve ratio by the
Reserve Bank of India; (iv) the importance of
anchoring expectations relating to both global and
domestic developments. In view of the above
unprecedented uncertainties and dilemmas, it is
important to take informed judgements with regard
to the timing and magnitude of policy actions; and
such judgements need to have the benefit of
evaluation of incoming information on a continuous
basis.
 To demonstrate on a continuing basis a
determination to act decisively, effectively and
swiftly to curb any signs of adverse developments in
regard to inflation expectations.
 The Reserve Bank will continue with its policy of
active demand management of liquidity through
appropriate use of the CRR stipulations and open
market operations (OMO) including the MSS and the
LAF, using all the policy instruments at its disposal
flexibly, as and when the situation warrants.
 Barring the emergence of any adverse and unexpected
developments in various sectors of theeconomy,
assuming that capital flows are effectively managed,
and keeping in view the current assessment of the
economy including the outlook for growth and inflation,
the overall stance of monetary policy in 2008-09 will
broadly be.
M.D.COLLEGE ECONOMICS

MONETARY MEASURES
 Bank Rate kept unchanged at 6.0 per cent.
 Reverse Repo Rate and Repo Rate kept unchanged at
6.00 per cent and 7.75 per cent, respectively.
 The Reserve Bank retains the option to conduct
overnight repo or longer term repo under the LAF
depending on market conditions and other relevant
factors. The Reserve Bank will continue to use this
flexibility including the right to accept or reject
tender(s) under the LAF, wholly or partially, if deemed
fit, so as to make efficient use of the LAF in daily
liquidity management.
 Cash reserve ratio (CRR) of scheduled banks increased
to 8.25 per cent with effect from the fortnight beginning
May 24, 2008.
Developmental and Regulatory Policies

OVERALL ASSESMENT OF
MONETARY POLICY OF 2008

 While aggregate supply capacities expanded and

alleviated domestic macro-imbalances in 2007-08 to
some extent, available indicators suggest that
economic activity in India currently continues to be
mainly demand-driven.
 The pick-up in inflation during the fourth quarter of
2007-08 has mainly emanated from supply-side
M.D.COLLEGE ECONOMICS

pressures such as the one-off increase in domestic

petrol and diesel prices to partially offset the global
crude oil price increase over the year; continuous
hardening of prices of petroleum products that are
not administered, rising prices of wheat and
oilseeds and the adjustment in steel prices in March
2008 due to the surge in international prices.
 The upsurge in inflation in India has occurred at a
time when global commodity prices have been
volatile at historically elevated levels and central
banks in mature and emerging economies alike have
been articulating heightened inflation concerns.
 There are concerns that demand pressures, which
have been reasonably contained so far, are being
coupled with supply-side factors which, if not
temporary, could impact domestic inflation
significantly.
 The moderation in non-food credit growth has been
marked in respect of interest-sensitive sectors
which had been recording significantly elevated
growth rates in preceding years.
 During the fourth quarter of 2007-08, financial markets
were impacted by unusual swings and high volatility in
foreign exchange flows as well as in cash balances of the
Government with the Reserve Bank with consequent
shifts in liquidity conditions.

 Growth forecasts for EMEs have been moderated in

the face of the financial turbulence and the
anticipated slowdown in the US economy. A key risk
to the outlook for EMEs is rising food, energy and
commodity prices that are already imparting
inflationary pressures and raising concerns about
impacting the momentum of growth in these
economies.
 The recent monetary policy responses in the US
have also heightened the uncertainties facing EMEs
M.D.COLLEGE ECONOMICS

by widening interest rate differentials and increasing

the costs of sterilisation, especially in a period when
inflationary pressures warrant tightening.
 The outlook for the global financial system is
overcast by the rising incidence of losses and write-
offs in banking systems in the US and Europe
amidst dislocations in the securitised credit market.
There are also growing uncertainties surrounding
the viability of financial guarantors and doubts
about their business models as well as the approach
of rating agencies with potential systemic
implications.
 In the overall assessment, there have been significant
shifts in both global and domestic developments in
relation to initial assessments. The dangers of global
recession have increased at the current juncture although
consensus expectations do not rule out a soft landing.
On the domestic front, the outlook remained positive up
to January 2008. Since then, the prospects for growth in
the year ahead have been trimmed as risks to inflation
and inflation expectations from the upside pressures due
to international food, crude and metal prices have
become more potent and real than before.
M.D.COLLEGE ECONOMICS

REPORT ON VISIT TO I.M.C.

When it was told by our professor to visit the IMC for

our Economics project on Monetary Policy we all were
extremely bored to go to Churchgate just for the project
but it was made compulsory by him to visit the library.
I went to the Dinshaw Library at IMC.I went after our
lectures got over in the college. I went from here by
train from Lower Parel station. Then after reaching the
Church Gate station I asked somebody about the Indian
Merchant Chambers. When I reached the main gate of
the IMC the watchman guided me to the building where
library is situated. I had to pay Rs. 60 as the library
charge.

In the library I asked the Librarian about the newspaper

cuttings related to RBI & Monetary Policy of 2007-08 &
2009-09. I searched around 5 files and got a lot of
cuttings about the RBI’s Monetary Policy.
Then I searched some books regarding RBI & Banking
sector. I got a lot of information about RBI and its
Monetary Policy. Then I selected which information and
which cuttings I require and gave it for Xeroxing over
there itself. They have the service of Xerox in the library
itself.

While the person over there was Xeroxing I surfed

many other books of the library and I even got some
information regarding my other subject projects as
well.

Initially I felt that there is no need of going to the library

but when I went there I realized the importance of the
visit which our Professor made it compulsory for us. It
is a lifetime chance to visit such an interesting place
M.D.COLLEGE ECONOMICS

where all knowledge is gained regarding any particular

subject. I am really grateful and I have very high
gratitude towards my Professor for giving me an
opportunity to visit such a place.
M.D.COLLEGE ECONOMICS

SUBMITTED BY,
SHARRDHA BHAGWAT.
ROLL NO. : 03.

T.Y.B.COM. (BANKING & INSURANCE)

M.D.COLLEGE ECONOMICS

Acknowledgement

The college faculty, classmates & the most

atmospheres in the college were all the favorable
contributions to be selected till the final copy was
prepared.

It was very enriching experience through out the

contributions from the following individuals in a
particular made sure that the project took its shape in
the form in which it appears today. I feel privileged to
tack this opportunity to put on record my gratitude
towards them.

Prof. Mrs. T. P. Ghule vice principal of our college

has always seen an inspiring & driving force.

Prof. Mr. LALIT TYAGI sure that resources were

made available in time & also for immediate advice &
guidance through out making this project.

I am thankful to Mr. Santosh Shinde associate with

administrator part of banking & insurance department.
Any errors, omissions or inconsistencies that remain
are also my responsibility.