Monetary Policy: Tools

Quantitative/Gen./Indirect
• Ratios: SLR, CRR & Incremental
CRR
• OMO & MSS
• Rates: Bank, MSF, LAF [Repo,
RR]
• Review of last one year’s Monetary
policies.
Qualitative: Selective, Direct
• Margin / LTV
• Consumer Credit control / EMI
• Credit Rationing /PSL
• Moral Suasion
• Direct Action
Bank Rate: Meaning? [as such defined in RBI act but..]

Long term Loan

Interes
t
rate:
6.75%
Bank rate not the main BANK
tool of m.policy but, RATE
If CRR/SLR not
maintained Collateral: Nothing
penalty-: bank rate+3 or
5%
REF: http://profit.ndtv.com/news/corporates/article-repo-rate-and-other-terms-explained-
Depending on repeat 302105
 Liquidity adjustment facility (LAF): Repo Rate: WEF 2000,

Repo Rate 6.25%

100 crore
client to Repurchase
@106.25 Cr.
Collateral: G-Sec
But not from SLR Overnight (1 day),
7 days, 14 days

Repo rate: rate @which clients borrow All clients eligible

short term funds from RBI, using G-sec
as collateral.
Marginal Standing Facility: Meaning? [WEF 2011, May]

MSF: 6.75%

100 crore
SCB to Repurchase
@106.75 Cr.
Collateral: After 1 day..
G-Sec Friday 3 days
Even from
SLRMSF= Repo +1% +0.5% Only SCB
(WEF Apr.2016) eligible
 What’re the differences between Repo vs MSF?

Term LAF-REPO MSF

Narshiman-II 2011; for

Father? (98)-> 2000 emergency,
Govts; Only SCB
Who? Banks, Non- MINUS
Banks RRB

Min. 5 cr. 1 cr.;

Collaterals Banks can’t Can use,

use SLR with
? quota caveats**
 Net demand and time liability (NDTL)
• Can pledge these, to
NDTL +100 Cr. borrow via MSF..Yet,
won’t be fined for SLR-
CRR -4 Cr. default under Banking
regulation Act.
SLR • but max. 1% of NDTL=
(G.Sec) -20.50 cr.
1 cr. & interest rate
LEFT 75.5 cr. 0.50%higher

Addl G- Can pledge this, to borrow via

Sec 5.5 cr. LAF-Repo window @6.25%

Lending 70 cr.
 LAF Reverse Repo Rate: Meaning?
Reverse Repo Rate
5.75%

100 crore

RBI to Repurchase
@105.75 Cr.
After 1|7|14 days
“it is interest rate paid by RBI to its clients for short term
loans.” all clients eligible. RR = R% -1% nahi 0.5%
 E-kuber (online) “Window” and instruments

OMO MSS’04 LAF’2000 MSF’2011

G-sec (upto 2 Repo: inject Repo-SLR
G-Sec
years) Liquidity securities
T-Bills-upto 364 T-bill-upto 364
RR: Suck liquidity Inject liquidity
days days
Buy: Inject
CMB’90 days
liquidity Fight Fight
Deflatio Inject Inflatio
Sell: Suck liquidity Sell: Suck liquidity n n Suck
Liquidit
liquidity
y
 Policy corridor = 0.5%; earlier it was 1% (or 100 basis points)
Reverse Repo
MSF (2011) Repo (2000)
(2000)
Liquidity Adjustment Facility (LAF)
window

+0.50% 6.25% -0.50%

Bank rate is
independent Policy Rate = Repo Rate.
…but =rate
MSF(usually
1%= 100 basis points
) 6.5%- decreased by 25 basis points
6.25= latest repo rate.
 M.Policy
1. a narrower corridor will ensure a
“finer alignment of the weighted
average call rate (WACR) with Why policy
the repo rate.” [call rate = inter corridor
bank borrowing, mainly to meet narrowed?
CRR requirement.]
2. ensure that durable liquidity in the
system.
3. Aid in policy transmission.

रट्टा मारो जिंदाबाद!

 Since Repo rate is our Policy rate…let’s focus

Repo Rate Car Loan 12% 1 lakh

6% Rate
Repo Car Loan 36%
Demand ▼
So reduce
18% MRP 70k to
attract
customers
Combat inflation:
▼money supply /▲interest rates to curb demand
Repo Rate and money supply

Asset Liability
M0: reserve
Repo money
Loans to High powered
Banks money

Asset Liability
Money Deposit:
Reserve: 10
Multiplie 100
r Currency
Loan: 90+.. Repo:__ with public
M1: Currency with Public + Demand
Deposits
Monetary Policy: Quantitative, General, indirect Tools

Combat Inflation Deflation

Easy /
Money? Tight / Dear
Cheap
Money
▼ ▲
supply
CRR/SLR ▲ ▼

Policy Rate
▲ (hike) ▼
(Repo Rate)
OMO|MSS* Sell Buy
 Monetary Policy: Tools
Quantitative/Gen./Indirect
• Reserve Ratios (CRR, SLR)
• OMO & MSS
• Rates: Bank, MSF, LAF [Repo,
RR]
• Next: Review of last year’s
Policies
Qualitative:
अब तुम्हारे हवाले Selective,
वतन
Direct साथियो!
• Margin / LTV
• Consumer Credit control / EMI
• Selective Credit Control (SCC),
Credit ceiling & Rationing, PSL
• Moral Suasion & Direct Action