HOW THE MONEY FLOWS IN THE
BANKING SYSTEM…
PART OF PRIORITY
MONETARY POLICY SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS
Money Market
Capital Market
+
MONETARY POLICY OF RBI
BEFORE GOING INTO THE DETAILS, LET US DIFFERENTIATE BETWEEN…
FISCAL POLICY
MONETARY POLICY
STRUCTURAL DEFICIENCIES IN THE SYSTEM
FISCAL POLICY
EXPENDITURE
FISCAL DEFICIT
REVENUE
MONETARY POLICY
“TO PRESERVE THE INTRINSIC VALUE
OF RUPEE”
STRUCTURAL DEFICIENCIES IN
THE SYSTEM
INADEQUATE INFRASTRUCTURE NO PROPER POST-HARVESTING FACILITIES
IMPROPER COLD STORAGE FACILITIES
MONETARY POLICY
RESERVE POLICY OPEN MARKET
1 RATIOS 2 RATES 3 OPERATIONS
CRR REPO BUYING & SELLING
SLR REVERSE REPO OF GOVT.
MSF SECURITIES (BONDS)
BANK RATE
“ TO PRESERVE INTRINSIC VALUE OF RUPEE”
“INDIRECTLY TO CONTROL INFLATION”
MONETARY POLICY
RESERVE
1 RATIOS
CRR SLR
This is as per section 42(1) of the RBI Act, 1934. This is as per section 24 of the Banking Regulation
{Amended through RBI (Amendment) Act, 2006} Act, 1949. {This was amended through the Banking
Scheduled Banks are required to maintain certain Regulation (Amendment) Act, 2007}
percentage of NDTL in cash form with a special No floor rate, but the ceiling is 40%.
account with RBI. To be maintained in cash, gold & approved
For securing monetary stability in the country. securities.
No floor & No ceiling rate. To hold certain percentage of NDTL in the above
forms as prescribed from time to time.
CASE - 1
IF CRR IS DECREASED BY 1%
Rs. 80,000 crore
CASE - 2
IF CRR IS INCREASED BY 1%
Rs. 80,000 crore
CASE - 1
IF SLR IS DECREASED BY 1%
Rs. 80,000 crore
CASE - 2
IF SLR IS INCREASED BY 1%
Rs. 80,000 crore
MONETARY POLICY
POLICY
2 RATES
REPO RATE REVERSE REPO RATE
This is the rate of interest the RBI charges from its Banks park additional funds with RBI under LAF.
clients (mostly SCBs) for short term borrowing.
Basically to adjust liquidity in banks’ day to day This will be for short term and they also earn
operations. interest.
Most of the western economies call it “rate of
discount.” It is kept 100 basis points below Repo rate.
It is the benchmark rate for inter bank short term This facility can be used by banks in case of
market (i.e. call money market) in India.
Banks normally use this route for one day surplus funds and interest rates are low.
borrowing to fulfill short term liquidity crunch.
Higher the repo rate, costlier the loans will become.
MONETARY POLICY
POLICY
2 RATES
MARGINAL STANDING FACILITY BANK RATE
This came into existence with effect from The interest rate which the RBI charges for its
9th May, 2011. long term lending is known as bank rate.
This is the last resort for banks at higher rate. Normally Banks, Financial institutions utilise this
It is introduced by RBI to reduce volatility in facility.
overnight lending rates in inter-bank market and This has got direct bearing on the long-term
to ensure smooth monetary transmission in lending activities of the Financial system.
financial system. This was realigned with MSF from February
Minimum amount which can be accessed through 2012.
MSF is Rs. 1 crore and can be in multiples of Rs. 1
crore.
POLICY RATES
WHERE DO THEY STAND?
MSF
& BANK RATE
REPO + 100 BASIS POINTS
REPO RATE
REPO - 100 BASIS POINTS
REVERSE
REPO RATE
NOW REPO RATE STANDS AS BASIS FOR ALL OTHER POLICY RATES
CASE - 1 MONETARY POLICY
OPEN MARKET
3 OPERATIONS
RBI SELLS BONDS
Government Securities
CASE - 2 MONETARY POLICY
OPEN MARKET
3 OPERATIONS
RBI PURCHASES BONDS
Government Securities
