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Economy: 1.how To Kick Start GS Preparation? 2.how To Prepare Economy? 3.banking: Monetary Policy
Economy: 1.how To Kick Start GS Preparation? 2.how To Prepare Economy? 3.banking: Monetary Policy
2. Banking- 3.Fiscal 4.
Finance Policy International
• Monetary Policy • Budget, • BoP, CAD
• Banking Sector Taxation-GST • WTO & other
• Capital Market • Subsidies Org.
• Fiscal Deficit • Policies
After economic survey is out
Budget Speech
Economic Survey
Newspaper
Source of preparation
1.NCERT 11, 12
2.Lecture +
Mrunal.org
3.Budget
+Survey
(10 Questions in CSAT-14)
(10 Questions in CSAT-14)
4.Hindu/IndianExpr
ess
Today’s topic:
Banking ►
Monetary Policy
1. Quantitative |
Qualitative tools
2. CRR, SLR, OMO
3. Repo, Reverse
Repo,
4. MSF, LAF,
Before money was invented
Double
Coincidence
Of wants
2 kg 500 gms
Birth & Evolution of money
Supply Demand
1 kg = Rs.100
Supply Demand
Inflation
Demand Demand
1 kg =
Rs.1000
Supply
Demand Demand
Inflation: ▲ ▲ supply
Demand Demand
1 kg =
Rs.100
Supply
Demand Demand
Reduce demand by ▼ money supply
Demand Demand
1 kg =
Rs.100
Supply
Demand Demand
Combat Inflation Deflation Combat
Depositors Borrowers
CRR: 04%
SLR: 21.5%
Total: 25.5%
Liabilities of a Bank
Demand
Liabilities
Time
Liabilities
Reserve ratio counted on NDTL
Demand Liabilities Time liabilities
Took out
20 Cr.
CRR SLR
4% 21.5%
Cash, Gold
Can’t lend RBI approved
No profit securities
Cash Reserve Ratio (CRR)
Deposit Examples • All Banks
Time FDRD • Penalty
Deposit • No profit. Except
Demand CASA 1999.
Deposit • Right now 4%
NDTL +100 cr. • IIM-A Prof D'Souza
report: allow gold-
Reserve forex investment
ratio • RBI said No, due to
CRR (-) 4% volatility
[no profit]
Statutory Liquidity Ratio
Deposit Examples • All banks
Time Deposit FDRD • In Cash, gold, RBI
Demand Deposit CASA approved securities
Net Demand and +100 cr.
Time Liabilities • Some “profit”.
(NDTL)
• Right now 21.5%
Reserve
CRR (-) 4 [no profit]
SLR (-) 22 [some
profit]
Money left =74 cr.
with bank
Fortnight lag
Fortnight Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
21.5 cr. SLR
Reserve Ratios
1.What is NDTL?
2.What are SLR and CRR?
3.How to use them against inflation
& deflation
Cyclic fluctuation: Inflation
CRR, SLR: 0%
Loan: 10%
10% of 2 crore
=20 lakh rupees
To combat inflation:
REDUCE Money supply
Cyclic fluctuation: Inflation
To combat inflation:
REDUCE Money supply
Hike in Bank Loan Interest Rates
10%
20%
50,000/-
48,000/-
Hike in Bank Loan Interest Rates
10%
20%
Inflation Deflation
RBI ▲ CRR/SLR RBI ▼ CRR/SLR
Banks left with less Banks are left with
money to lend
more money
▲ interest rates to keep
Profit margin same They ▼ interest
People borrow ▼ rates to get new
demand ▼ clients
Prices ▼ People borrow ▲
= Inflation controlled Demand ▲
= Price ▲
Monetary Policy: Quantitative Tools: Reserve Ratios
Inflation
fight
HOW? Tight |
Dear
CRR, ▲▲▲
SLR ▲▲
Monetary Policy: Quantitative Tools: Reserve Ratios
Inflation Deflation
fight fight
HOW? Tight | Easy |
Dear Cheap
CRR, ▲▲▲ ▼▼▼
SLR ▲▲ ▼▼
Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should
pursue Cheap money policy.
B. To combat deflation, RBI should ▲ ▲
Statutory liquidity ratio (SLR)
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3.
Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should pursue
Cheap money policy. (WRONG: follow
DEAR/TIGHT)
B. To combat deflation, RBI should ▲ ▲
Statutory liquidity ratio (SLR) (WRONG:
should ▼ ▼ SLR)
C. Both A and B
D. Neither A nor B (Correct Answer)
1. Skip 2. Attempt 3.
Mock Question
Find incorrect statement(s)?
A. To combat inflation, RBI should pursue
Cheap money policy. (WRONG: follow
DEAR/TIGHT)
B. To combat deflation, RBI should ▲ ▲
Statutory liquidity ratio (SLR) (WRONG:
should ▼ ▼ SLR)
C. Both A and B (Correct Answer)
D. Neither A nor B
1. Skip 2. Attempt 3.
Mock Question UPSC 2010
When RBI ▲ ▲s CRR, It means ___.
A. RBI will have less money to lend
B. Government will have less money to
spend.
C. Commercial banks will have more
money to lend
D. Commercial banks will have less
money to lend
1. Skip 2. Attempt 3.
Mock Question UPSC 2010
When RBI announces an ▲ ▲ of Cash reserve
ratio, what does it mean?
A. RBI will have less money to lend (irrelevant)
B. Union government will have less money to
spend. (irrelevant)
C. Commercial banks will have more money to
lend (wrong. Reverse will happen)
D. Commercial banks will have less money to
lend (right)
1. Skip 2. Attempt 3.
Bi- Ban
Rep
monthl 2014 k MSF RR SLR CRR
o
y Rate
first April 23 4
22.
second June 4
5
Augus
third 22 4
t
fourth Sep 22 4
Fifth Dec 22 4
Surpriz 15/1/1
Reserve Ratios
SLR
RBI
Reduced SLR
To flow money in
Productive
Promised fiscal sectors of
Economy
consolidation
Both counted on Have to set aside this
NDTL much cash in reserve.
TIME(FDRD) Profit? NO!
Demand
(CASA)
Bank SLR
Rate
MSF Repo RR
21.5
CRR
8.25 8.25 7.25 6.25 % 4%
Depositors Borrowers
Idle money
=LOSS MAKING
Must invest
G-Sec: 8%
Liquidity / money supply
▼ ▼d ▲ ▲d
Quant. Inflation
Tool fight
Tight/dear
CRR, ▲▲
SLR
To fight inflation,
OMO Sell
I’ve to ▼ ▼ money supply
from the system
Quant. Inflation Deflation
Tool fight fight
Tight/dear Easy/
Cheap
CRR, ▲▲ ▼▼
SLR
OMO Sell Buy
MCQ (UPSC-2013)
In context of Indian Economy, ‘Open Market
Operation’ refers to
A. Borrowing by scheduled banks from RBI
B. Lending by commercial banks to
industries and trade
C. Purchase and sale of government
securities by the RBI
D. None of Above
1. Skip 2. Attempt 3.
MCQ (UPSC-2013)
In context of Indian Economy, ‘Open Market
Operation’ refers to
1. Borrowing by scheduled banks from RBI
(Repo/Bank)
2. Lending by commercial banks to
industries and trade (irrelevant)
3. Purchase and sale of government
securities by the RBI (RIGHT)
4. None of Above
1. Skip 2. Attempt 3.
Which of the following will ▲ ▲ CSAT-2012
Money supply in the economy?
Answer
1. Purchase of government Choices
securities from public by central
bank A. Only 1
2. Deposit of currency in B. 2 and 4
commercial banks by the public
C. 1 and 3
3. Borrowing by government from
the central bank. D. 2, 3 and
4. Sale of government securities to 4
the public by central bank.
Which of the following will ▲ ▲ CSAT-2012
Money supply in the economy?
Answer
1. Purchase of government securities
from public by central bank Choices
2. Deposit of currency in commercial A. Only 1
banks by the public B. 2 and 4
3. Borrowing by government from C. 1 and 3
the central bank.
4. Sale of government securities to D. 2, 3 and
the public by central bank (Bhai) 4
(▼ ▼S Money supply)
CSAT-2012
Which of the following will ▲ ▲ Money
supply in the economy? Answer
1. Purchase of government securities
Choices
from public by central bank (right)
A. Only 1
2. Deposit of currency in commercial
banks by the public B. 2 and 4
3. Borrowing by government from C. 1 and 3
the central bank. (Public finance)
D. 2, 3 and 4
4. Sale of government securities to
Test series
the public by central bank (▼ ▼S
“A”, Q77,
Money supply)
Ans.C
1. Skip 2. Attempt 3. Mark n Review
Monetary Policy
Quantitative tools
1.Reserve Ratio (SLR, CRR)
2.Open Market operation
3.Rates: Bank Rate, Repo Rate,
MSF, LAF
Bank Rate: Meaning?
Long term
Loan
Interest
rate: 9%
BANK
RATE
Collateral:
Nothing
Bank Rate Loans 5%
Bank Rate Loans 48%
3%
36%
Less demand
Inflation
controlled
Monetary Policy
Quant. Inflation Deflation
Tool fight fight
CRR, ▲▲ ▼▼
SLR
OMO Sell Buy
Bank ▲▲ ▼▼
RATE
Bank Rate: WHY?
Not the main tool to control
money supply these days.
Bank rate is Linked with penal
rates:
If CRR, SLR not maintained:
Penalty= (Bank rate + 3%); 5%
CRR, SLR Fortnight lag
Fortnight Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
21.5 cr. SLR
Otherwise penalty
Bank Rate + 3%
Bank Rate + 5%
Have to set aside
Long term loan this much cash in
from RBI reserve.
without No Profit
Bank
collateral MSF Repo RR SL CR
Rate R+1 R% R-1 R R
LAF NDTL
Banks have to keep this
much in cash, gold, G-sec &
other RBI approved
LAF: Liquidity Adjustment Facility (2000)
Collateral? = Government security.
LAF Short term loans.
Repo When clients borrow
from RBI. 8%
Reverse When clients deposit
Repo money in RBI. 8-
1=7%
Repo Rate: Meaning?
Repo Rate
8%
100 crore
SBI to
Repurchase
@108 Cr. Collateral: G-
After 7 days Sec
Bank can’t use
these G-sec to
borrow under
Repo
What’s the difference?
LAF (Repo) MSF
Minimum 5 cr 1 cr.
All clients eligible Only scheduled
1. Central & State commercial banks
Government can bid.
2. All Banks Paid up cap. 5l,
protect interest of
3. NBFI (LIC, UTI)
depositors=> RBI
Act 1934, 2nd Sch.
LAF (Repo) MSF
Bank cannot
use SLR quota
Can use
securities Maximum
No limit. Borrow
according to
limit 0.75%
your securities. NTDL.
R% R+1%
Bank use these
G-sec to borrow
under MSF
0.75% of NDTL
=75 lakh
borrow
Reverse Repo Rate: Meaning?
Reverse Repo
Rate 7%
100 crore
RBI to
Repurchase
@107 Cr. Collateral: G-
After 7 days Sec
Reverse Repo
Reverse repo rate = “it is interest rate
paid by RBI to its clients for short term
loans.”
Central & State Government, All Banks,
NBFI
Collateral: government securities
2011: RR = Repo – 1% (100 basis points).
Dec 2014: Repo = 8%.
Reverse repo =8-1=7%
(
ReR%
p ) o MSF
Repo
R+ 1 %
rse
eve -1%
R
POLICY RATE
1%= 100 basis points
8%- decreased by 25 basis
points
8.00-0.25=7.75 (15/Jan/15)
During inflation
CPI
WPI
Ban
Bi-
k MSF Rep RR
month 2014 SLR CRR
Rat +1 o -1
ly
e
first April 9 9 8 7 23 4
secon 22.
June 9 9 8 7 4
d 5
Augu
third 9 9 8 7 22 4
st
Sept,3
Ban
Bi-
k MSF Rep RR
month 2015 SLR CRR
Rat +1 o -1
ly
e
RBI should decrease 1. Banks not passing
policy
8.2 8.2 7.2 6.22. Must
21. check
ThirdrateAug
to boost 4
Growth 5 5 5 5 5
inflation
All clients can borrow short Have to set
Long term loan term loans from RBI @this
aside this much
from RBI interest rate. can’t use SLR
securities though! cash in reserve
=no income
Bank
Rate
MSF Repo RR SLR CRR
8.25 8.25 7.25 6.25 21.5% 4%
1. Skip 2. Attempt 3.
Limitation
of Monetary policy
1.Why it failed to contain inflation?
(2013-14)
2.Urjit Patel Committee
recommendations
How does Policy rate affects economy?
Billion Rs. 2013
DEMAND 8,142
TIME 77,963
Monetary Policy: limitations (Developing-countries)
Urjit Patel
Dy. Governor
Revise and Strengthen Monetary policy framework
Urjit Patel
Expert Committee to Revise
and Strengthen the Monetary Monetary
Policy Framework Policy
January 2014 report: Reforms
Three Major Recommendation:
1. RBI inflation targets (2-6%)
2. Government help RBI
3. RBI fix accountability
Until Now Urjit Patel
CPI
WPI
Urjit Patel
1. RBI target inflation with
deadline
Monetary
2. Government should help RBI Policy
3. RBI’s accountability has to be
fixed
Urjit Patel
MNREGA: wage ▲ ▲…yes.
Productive growth…no? Governme
Subsidy leakage, corruption nt to help
Administered price…x RBI
Fiscal consolidation
Monetary Policy: accountability in India
RBI Act.
Governor directly accountable to Government
Govt. can issue directives to RBI in public
interest.
Parliament’s standing Committee on finance-
can summon Governor Avg. 3-4/year.
Monetary policy made by Governor alone.
(sign.)
OVERALL No formal accountability
mechanism.
Urjit: Monetary Policy: accountability in India
Target: 4% (2% band)= 2-6% .
Failure?? Three quarters successively.
MPC issue public statement
1. Each member will sign it
2. Reasons for failure
3. Action proposed
4. Time-frame for result.
Each cluster Existing dept will be grouped into
Monetary
FIVE clusters
policy
headed by COO
Dy.Gov. rank
Need Govt. Services Regulatory
approval
Financial
Supervision
market
Self Study
NCERT Class12:
Macroeconomics
Chapter 3 Money and Monetary
banking Policy
Ignore complicated graphs-
formula-equations
WPI, CPI, IIP,
inflation=>L5/P5.pptx
Next
Qualitative tools
Banking sector evolution since British
India
Financial inclusion: PM-JDY, KVP etc.