money management by rbi

8/8/2019 Money Management by RBI

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RBI

SCHEDULE

BanksNon Schedule

Banks

State Co-

operativeCommercial

Indian Banks Foreign Banks

PSU Banks Pvt Sector

SBI & its

Subsidiaries

Other

Nationalized

Banks

Regional &

Rural Banks


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RESERVE BANK OF INDIA

It is an apex institution of the monetary and banking

structure of a country. A central bank has the authority to

regulate and control the banking business and monetary

system of a country.

Its main function are:

Bank of issue

Financial advisor to the state( banker also)

Banker to bankCustodian of foreign exchange reserves

Lender of the last resort

Bank of central clearance and transfer

Controller of credit


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WAYS OF MONEY MANAGEMENT BY RBI

Two important tools of macroeconomic policy .

They are :

Monetary Policy

Fiscal Policy

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.


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MONEY MANAGEMENT USING MONETARY

POLICIES

This policy statement, traditionally announced twice a year,through which the Reserve Bank of India seeks to ensure

price stability for the economy.

Regulates the supply of money and the cost and availability

of credit in the economy. Deals with both the lending and borrowing rates of interest

for commercial banks.

Policy aims to maintain price stability, full employment and

economic growth. The Reserve Bank of India is responsible for formulating and

implementing Monetary Policy by increase or decrease the

supply of currency as well as interest rate, carry out open

market operations, control credit and vary the reserve

requirements.


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SOME MONETARY POLICY TERMS

Bank RateMinimum rate at which the central bank provides loans

to the commercial banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial

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

credit.

Cash Reserve Ratio

All commercial banks are required to keep a certainamount of its deposits in cash with RBI. This percentage is

called the cash reserve ratio. The current CRR requirement is 6

per cent.


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Money Supply (M3)

Refers to the total volume of money circulating in the

economy, & comprises currency with the public and demand

deposits (current account + savings account) with the public.

The RBI has adopted Three concepts of measuring

money supply.

The first one is M1, which equals the sum of currency with the

public, demand deposits with the public and other depositswith the public. Simply put M1 includes all coins and notes in

circulation, and personal current accounts.

The second, M2, is a measure of money, supply, including M1,

plus personal deposit accounts - plus government deposits anddeposits in currencies other than rupee.

The third concept M3 or the broad money concept, as it is also

known, is quite popular. M3 includes net time deposits (fixed

deposits), savings deposits with post office saving banks and all

the components of M1.


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Statutory Liquidity Ratio(SLR)

Banks in India are required to maintain 25 per cent of

their demand and time liabilities in government securities and

certain approved securities.

These are collectively known as SLR securities. The

buying and selling of these securities laid the foundations of

the 1992 Harshad Mehta scam.

Repo

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.


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Open Market Operations

An important instrument of credit control, the Reserve

Bank of India purchases and sells securities in open market

operations.

Reverse Repo

Rate at which Reserve Bank of India (RBI) borrowsmoney from banks. Banks are always happy to lend money to

RBI since their money are in safe hands with a good interest.

An increase in Reverse repo rate can cause the banks to

transfer more funds to RBI due to this attractive interest

rates. It can cause the money to be drawn out of the bankingsystem.

Due to this fine tuning of RBI using its tools of CRR, Bank

Rate, Repo Rate and Reverse Repo rate our banks adjust

their lending or investment rates for common man.


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MONEY MANAGEMENT USING FISCAL

POLICIES

Fiscal policy is a broader tool with the government.

The Fiscal Policy can be used to overcome recession and

control inflation.

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.


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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'sFiscal Policy.

We can say in case of RBI

Monetary Policy + Governmental Aspect = Fiscal Policy

money management by rbi

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