Chapters :

Money & Banking - 04

ASSETS AND LIABILITIES OF RBI

HIGH POWERED MONEY

The total liability of the monetary authority of the country, The RBI Is Called The Monetary Base Or High Powered Money. It consists of currency notes (notes and coins in circulation with the public and vault cash of commercial banks), deposits held by the government of India and commercial banks with RBI.

The deposits with RBI are also payable and are a claim of the general public, government or commercial banks are hence liability of the RBI. Hence RBI acquires Assets against these liabilities.

ASSETSLIABILITIES
GoldCurrency
Foreign ExchangeCurrency held by public
Govt Securities (Loans To Govt)Vault Cash held by commercial banks
Loan to commercial banks

Deposits of commercial bank

with RBI    Treasury deposits of GOI

RBI’S RESERVE AND SURPLUS CAPITAL

In 2019 the committee on Economic Capital Framework headed by Bimal Jalan was set up by RBI to share the surplus capital with the government. The RBI, on its advice transferred 1.76 Lakh Crore to the government. The following recommendations were made:

  1. Distinction between Realised equity and revaluation balances. Realised equity could be used for meeting risk while revaluation balances for risk buffers against market risk.
  2. The Revaluation Balance of the central bank should not be distributed.
  1. For risk provisioning, the committee recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions in place of the extant stressed value at risk.
  2. The contingent risk buffer to be maintained at 6.5% to 5.5% of the RBI’s balance sheet; 5.5% to 4.5% for monetary and financial stability risk and 1.0% for credit and operational risk.

MONETARY POLICY

Monetary policy refers to the policy undertaken by the central bank to influence the availability, determine the size and rate of growth of money supply in the Economy.

OBJECTIVES OF MONETARY POLICY

  • Economic Stability And Growth
  • Ensuring Inflation Targeting And Price Stability
  • Full Employment
  • Stable Economic Growth.

MONETARY POLICY COMMITTEE  (MPC)

MPC of India is responsible for fixing the Benchmark Interest Rate In India. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.

The committee comprises Six Members

  1. Three officials of the Reserve Bank of India
  2. Three external members nominated by the Government of India.

The Governor of Reserve Bank of India is the Chairperson Ex- Officio of the committee. Decisions are taken by majority with the Governor having the casting vote in case of a tie. The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an upper tolerance of 6% and a lower tolerance of 2%.

TYPES OF MONETARY POLICY

  1. 1. EXPANSIONARY MONETARY POLICY
  2. It increases the supply of money in an economy by making credit supply easily available by reducing the interest rates.
  3. Money produced through such a policy is called cheap money

iii.     It is utilized when an economy at the recession with low growth and high level of unemployment.

  1. CONTRACTIONARY MONETARY POLICY

It decreases the supply of money in Economy and used to tackle the menace of inflation in the economy by raising the interest rates.

Other Monetary policy stance:

  1. NEUTRAL STANCE – interest rates may move either way- upward or downward
  2. CALIBRATED TIGHTENING – interest rates can move only upward.
  3. HAWKISH STANCE – Contractionary stance aimed at checking inflation form rising (linked to statutory goals of inflation targeting “Headline Inflation”)

TOOLS TO REGULATE MONETARY POLICY

QUANTITATIVE CREDIT CONTROL METHOD

These methods are designed to control the overall volume of credit created in an Economy.

  1. STATUTORY LIQUIDITY RATIO

It is a ratio of total deposits of a bank in which it has to maintain itself in the form of liquid funds comprising cash and mainly government securities.    Objective of SLR is to enable the government to borrow from banks against its securities. Under this all the commercial banks operating in the country are supposed to maintain a part of their total deposits (i.e. their NDTL with themselves in non-cash form i.e. liquid assets), the ratio is fixed by RBI.

The present SLR (March 2020 is 18.25% of the NDTL of the banks.

  1. CASH RESERVE RATIO (CRR)

It is ratio of the total deposits of a bank in which a bank has to keep in cash with the RBI at any given point of time. CRR deposits don’t earn any interest for banks. CRR is a tool to manage credit and inflation. It fixes the rate between 3% to 15%.

The present CRR is 3%

For E.G. : The bank has the total deposit of Rs.100 cr. has to keep Rs.3 r with RBI, It this ratio goes up, banks have less money to lend or Vice – Versa.

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