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RBI Monetary Policy – Detailed Overview for IBPS PO/Clerk 2018 | Download in PDF:

RBI Monetary Policy is the important banking awareness topic for banks exams. Candidates those who are having a passion to work in a banking sector should be aware of the RBI monetary policy. This is not only for the exam point of view. Everyone should know how the monetary authority of India controls the monetary policies in India. For every competitive exam, there will be a chance for asking 2 or 3 questions from the RBI Monetary policy topic. Banking awareness section plays a vital role in bank exams to boost up your mark in the overall cutoff. If you go through this topic thoroughly means you can able to score good marks in the banking awareness section. Dear Readers, Here we have given a detailed overview of the RBI Monetary Policy, candidates those who are preparing for the upcoming IBPS PO/Clerk examination can make use of it.

RESERVE BANK OF INDIA – RBI MONETARY POLICY

Prior to the establishment of RBI, the functions of a central bank were virtually being done by the Imperial Bank of India. RBI started its operations from April 1, 1935. It was established via the RBI act 1934, so it is also known as a statutory body.
The core structure of RBI includes one Central Board of Directors, two Assistive bodies (BFS and BPSS), four local boards, 33 departments, 19 regional offices and 9 sub-offices.

Main functions of RBI

a) To work as monetary authority and implement its Monetary Policy.

b) To serve as issuer of bank notes.

c) Serve as banker to Central and State Governments.

d) Serve as debt manager to central and State Governments.

e) Provide ways and means advances to the State Governments.

f) Serve as banker to banks and lender of last resort (LORL) for them.

g) Work as supervisor and regulator of the Banking and Financial System.

h) Management of Foreign Exchange Reserves of the country.

i) Support the government in the department of the country.

Meaning and Objectives of RBI Monetary Policy:

Monetary policy refers all those operations, which are used to control the money supply in the economy. The overall objective of the monetary policy is two-fold:

a) To maintain economic and financial stability.

b) To ensure adequate financial resources for the purpose of the department.

These objectives can further be simplified to:

a) Maintaining price stability.

b) Adequate flow of credit to productive sectors.

c) Promotion of productive investments and trade.

d) Promotion of exports and economic growth.

Reserve Bank of India announces Monetary Policy every year in the Month of April. This is followed by three quarterly Reviews in July, October and January.

Various tools/instruments of RBI Monetary Policy

Various instruments of RBI monetary policy can be divided into

Quantitative instruments: Which are direct affects the quantity of money supply in the economy.

Qualitative instruments: Impact the money supply indirectly.

QUANTITATIVE INSTRUMENTS:

a) Open Market Operations (OMO): OMO refers to the purchase and sale of the Government Securities by RBI from/to market. The objective of OMO is to adjust the rupee liquidity conditions in the economy on a durable basis. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.

b) Liquidity Adjustment Facility (LAF): LAF is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market. LAF was first introduced in June 2000. It refers to the difference between the two key rates viz. Repo Rate and Reverse Repo Rate. Informally, Liquidity Adjustment Facility is also known as Liquidity Corridor.

i) Repo Rate: It is the rate of interest at which lends money to commercial banks for short term. Any reduction in the repo rate helps banks to get money at a cheaper rate.

ii) Reverse Repo rate: It is the rate at which RBI borrows money from commercial banks. It is usually 1% less than Repo rate.

c) Marginal Standing Facility (MSF): MSF is new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in its credit policy of May 2011. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.

d) Statutory Liquidity Ratio (SLR): The banks and other financial institutions in India have to keep the fraction of their net time and demand liabilities in the form of Liquid assets as Government Securities, precious metals, other approved securities. This fraction is called Statutory Liquidity Ratio (SLR).

e) Cash Reserve Ratio (CRR): CRR is the amount of funds that the banks are bound to keep with Reserve Bank of India as a portion of their Net Demand and Time Liabilities (NDTL). This is also a statutory pre-emption because it draws its legality from the Banking Regulation Act 1949.

f) Bank Rate: Bank Rate refers to the official interest rate at which RBI will provide loans to the banking system which includes commercial/cooperative banks, development banks etc. Such loans are given out either by direct lending or by rediscounting (buying back) the bills of commercial banks and treasury bills. Thus, bank rate is also known as the discount rate.

g) Credit Ceiling: Under the credit ceiling, RBI informs the banks to what extent/limit they would be getting credit. When RBI imposes a credit limit, the banks will get tight in advancing loans to the public. Further, RBI may also direct the banks to provide certain fractions of their loans to certain sectors such as the farm sector or priority sector.

QUALITATIVE INSTRUMENTS

a) Margin requirements refer to the difference between the securities offered and the amount borrowed by the banks.

b) Consumer credit regulation refers to issuing rules regarding down payments and maximum maturities of instalment credit for the purchase of goods.

c) RBI Guidelines refers to the oral, written statements, appeals, guidelines, warnings, etc, to the banks by RBI.

d) Rationing of the credit refers to control over the credit granted/allotted by commercial banks.

e) Moral Suasion refers to a request by the RBI to the commercial banks to take certain measures as per the trend of the economy.

f) Direct Action was taken by the RBI against banks that don’t fulfil conditions and requirements. RBI may refuse to rediscount their papers or may give excess credits or charge a penal rate of interest over and above the Bank rate, for credit demanded beyond a limit.

IMPORTANT NOTES about Bi-monthly RBI Monetary Policy:

Raghuram Rajan the governor of RBI’s has published the third bi-monthly RBI monetary policy statement for the fiscal year 2018-19 on August 6^th 2018.

Major Highlights of RBI’s third bi-monthly monetary policy statement:-

i) Repo Rate-6.50%

ii) Reverse Repo Rate – 6.25%

iii) Marginal Standing Facility Rate (MSF)- 6.75%

iv) Bank Rate- 6.75%

v) Cash Reserve Ratio (CRR)- 4%

vi) Statutory Liquidity Ratio (SLR)- 19.5%

vii) Base Rate – 8.85% – 9.45%

viii) Savings Deposit Rate – 3.50% – 4.00%

ix) Term Deposit Rate> 1 Year 6.25% – 7.25%

x) Growth forecast at 7.4% for the current fiscal.

xi) Inflation target remains 5% for January 2019, upside risk.