Description
It explains on Instruments of Monetary Management covering basics like repo rates,reverse repo,credit control,CRR,SLR,credit policy.
Instruments of Monetary Management
Credit Policy:
1) Selective credit controls 2) General credit controls
Monetary Variables :
Cost of Credit : - Bank rate - Repo rate - Reverse repo
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system.
Bank Rate Policy of Reserve Bank of India
Year
1963 1971 1981 1991
2001
Bank Rate
4.5% 6% 10% 12%
6%
Availability of Credit
? CRR Year
1981 1991 1994 1997 2003
CRR
7.50% 25% 15% 8% 4.5%
? SLR Year
1972
SLR
30%
1984
1995 1997
36%
31.50% 25%
2001
25%
Theoretically, the bank rate is the rate at which the central bank offers refinance to the commercial banks. The dormant bank rate received a fresh lease of life six years back in 1997 when Rangarajan revived it and linked it to a Rs 4,600-crore (Rs 46 billion) general refinance kitty. The bank rate was raised to 11 per cent in July 1991 and further to 12 per cent in October 1991 against the backdrop of high inflation and a difficult balance of payments. The rate stood at that level for nearly six years despite changes in various economic parameters
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system.
it's the repo rate -- or the rate at which the central bank borrows money to suck out short-term liquidity from the system -- that is emerging as an important signal for bankers to adjust interest rates. the bank rate is losing its relevance as a signalling device
Indeed, there have been occasions when bankers refused to cut their prime lending rates in response to a bank rate cut. It is another matter that as a concept PLR too is losing its relevance with most borrowers raising bank loans at below PLR. Lending rates now depend on the cost of funds, not the bank rate. The cost of funds is decided by market forces which, to a large extent, are guided by the short-term repo rate.
Ever since the bank rate was reactivated in April 1997 by former Governor C Rangarajan as the most powerful indirect tool of monetary control, the central bank's monetary policy has rested on the tripod of the CRR, repo rate and bank rate.
The bank rate was raised to 11 per cent in July 1991 and further to 12 per cent in October 1991 against the backdrop of high inflation and a difficult balance of payments. The rate stood at that level for nearly six years despite changes in various economic parameters. Till 1997, the bank rate had little operational significance since the refinance rate was fixed at a lower level. Rangarajan felt it was necessary to make the bank rate an effective signal rate as well as a refinance rate. So he brought down the bank rate to the level of the export refinance rate since the latter was blunting the efficacy of the signal rate
Ideally, when the central bank moves the bank rate, like the discount rate in the US, all rates in the economy should move in tandem. Bankers expect a rate cut to signal a general downward trend in interest rates which was flagged off by Finance Minister Jaswant Singh in the Union Budget. But the point to note is that it was the repo rate that the RBI cut (along with the savings bank rate) hours after the Budget was presented on February 28
But the point to note is that it was the repo rate that the RBI cut (along with the savings bank rate) hours after the Budget was presented on February 28. Even though the repo is a short-term instrument, this is emerging as the new anchor for the market because the yield curve of government securities or gilts is also being built on this rate. In the gilts market, in fact, it is the shortterm rates that are influencing long-term rates instead of the other way round. For instance, the repo rate -- which is effectively a one-day rate -- is pegged at 5 per cent. The overnight interbank call rate is slightly lower than the repo rate and the 91-day and 364-day treasury bill yields are around 15 to 20 basis points over the repo rate.
Credit Policy Feb 2008
?Bank rate, reverse repo rate, repo rate and cash reserve ratio (CRR) kept unchanged.
? The flexibility to conduct overnight or longer term repo including the right to accept or reject tenders under the liquidity adjustment facility (LAF), wholly or partially, is retained.
? Overall real GDP growth projection for 2007-08 at around 8.5 per cent is retained. ? The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 while conditioning expectations in the range of 4.0-4.5 per cent.
Monetary Measures
Bank Rate kept unchanged at 6.0 per cent. The reverse repo rate and the repo rate under the LAF are kept unchanged at 6.0 per cent and 7.75 per cent, respectively. The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management. CRR kept unchanged at 7.5 per cent
The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants
?
?
While non-food credit has decelerated, growth in money supply and aggregate deposits of scheduled commercial banks continue to expand well above indicative projections. High growth in reserve money is driven by large accretion to RBI's net foreign exchange assets.
Liquidity management will assume priority in the conduct of monetary policy through appropriate and timely action. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:
?
?
? As on January 4, 2008 money supply (M3) increased by 22.4 per cent on a year-on-year basis which was higher than 20.8 per cent a year ago and well above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08. ? Reserve money increased by 30.6 per cent on a year-onyear basis as on January 18, 2008 as compared with 20.0 per cent a year ago. ? In the current financial year, the growth in aggregate deposits of scheduled commercial banks (SCBs), on a year-on-year basis, at Rs.6,00,761 crore (25.2 per cent) was higher than that of Rs.4,44,241 crore (22.9 per cent) a year ago.
? On a year-on-year basis, non-food credit of SCBs expanded by Rs.3,82,155 crore (22.2 per cent) as on January 4, 2008 on top of the increase of Rs.4,16,418 crore (31.9 per cent) a year ago. ? The year-on-year growth in total resource flow from SCBs to the commercial sector decelerated to 21.7 per cent from 30.1 per cent a year ago. ? Banks' holdings of Government and other approved securities at 29.1 per cent of their net demand and time liabilities (NDTL) as on January 4, 2008 was marginally higher than 28.6 per cent a year ago.
External Developments
During April-November 2007, merchandise exports rose by 21.9 per cent in US dollar terms as compared with 26.2 per cent in the corresponding period of the previous year. Import growth was also lower at 26.9 per cent as compared with 27.4 per cent in the previous year. The merchandise trade deficit widened to US $ 52.8 billion from US $ 38.5 billion in the previous year. While oil imports recorded a lower growth of 9.8 per cent as compared with 42.0 per cent a year ago, non-oil imports increased by 35.3 per cent as compared with 21.3 per cent a year ago. Foreign exchange reserves increased by US $ 85.7 billion during the current financial year so far and stood at US $ 284.9 billion on January 18, 2008.
? Foreign exchange reserves increased by US $ 85.7 billion during the current financial year so far and stood at US $ 284.9 billion on January 18, 2008. ? Over the end-March 2007 level, the rupee appreciated by 9.61 per cent against the US dollar, by 8.85 per cent against the pound sterling and by 0.95 per cent against the Japanese yen, but remained unchanged against the euro as on January 25, 2008.
Developments overall domestic
? Domestic activity continues to be investment driven, supported by external demand. Building up of supply capacities, both new and existing, is strongly underway as reflected in the sustained demand for domestic and imported capital goods. ? Key indicators point to the persistence of aggregate demand pressures, including into the near-term ? There has been some improvement in the finances of the Central Government as the gross fiscal deficit has declined indicating that adherence to the Fiscal Responsibility and Budget Management (FRBM) rules in the current financial year is on track.
Stance of Monetary Policy
A disaggregated analysis of supply and demand factors across select sectors would enable appropriate public policy responses keeping in view the employment intensity of some of these sectors. Monetary policy, per se, can essentially address issues relating to aggregate demand but the associated policies in the financial sector could, to the extent possible, take account of the evolving circumstances as reflected in the disaggregated analysis. In view of the prevailing liquidity conditions and the sustained profitability of banks as reflected in net interest margins, there is a need for banks to undertake institutional and procedural changes for enhancing credit delivery to sectors that are employment-intensive
To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion. To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate
Extending the spread, the five-year paper yield is around 60 basis points over the repo rate and the 10-year paper yield 85 to 90 basis points higher at 5.85 to 5.90 per cent. In other words, even though the repo is a short-term rate, it is influencing the entire interest rate structure in the market. This is bound to happen in a liquidity surplus system where nobody borrows at the bank rate and everybody wants to lend at the repo rate. In effect, in such a situation it is the rate at which the RBI borrows from the market that becomes the anchor and not the rate at which commercial banks borrow from the RBI.
In normal circumstances, the repo rate should act as the floor for the call rates. But these are abnormal times when the RBI is lapping up every dollar from the forex market and the money used for the dollar purchase is adding to the deluge of rupee liquidity. Whether the RBI admits it or not, the repo is the new anchor for the financial system. Its sanctity can be preserved only if it is cut to a realistic level (around 4.5 per cent or so). The bank rate and CRR cut can, at best, complement it.(this article appeared in 2004}
Banking Industry Return on Asset %
Country France Germany 1986 0.35 0.81 1988 0.38 0.73 1990 0.25 0.63 1992 0.23 0.51 1993 -0.03 0.55
Italy
Spain U.K.
1.20
0.81 1.19
0.91
1.36 1.51
1.18
1.53 0.71
0.92
1.56 0.44
0.99
0.09 0.75
United States non financial companies’ financial structure (%)
Type of Instrument US bank loans Commercial paper Loans, finance companies Bonds Mortgages 1965 57.3 1.7 5.2 25.6 11.7 1980 48.7 6.9 3.7 66.6 -36.2 1984 28.9 12.7 9.7 39.3 -0.8 1988 16.5 5.9 8.0 57.8 7.1 1989 16.5 10.6 5.7 57.7 2.3
Mergers and acquisitions in EU (No. of Transactions)
Sector Banks Insurance Other Financial companies 1984 52 24 76 1989 239 101 340
doc_320559449.ppt
It explains on Instruments of Monetary Management covering basics like repo rates,reverse repo,credit control,CRR,SLR,credit policy.
Instruments of Monetary Management
Credit Policy:
1) Selective credit controls 2) General credit controls
Monetary Variables :
Cost of Credit : - Bank rate - Repo rate - Reverse repo
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system.
Bank Rate Policy of Reserve Bank of India
Year
1963 1971 1981 1991
2001
Bank Rate
4.5% 6% 10% 12%
6%
Availability of Credit
? CRR Year
1981 1991 1994 1997 2003
CRR
7.50% 25% 15% 8% 4.5%
? SLR Year
1972
SLR
30%
1984
1995 1997
36%
31.50% 25%
2001
25%
Theoretically, the bank rate is the rate at which the central bank offers refinance to the commercial banks. The dormant bank rate received a fresh lease of life six years back in 1997 when Rangarajan revived it and linked it to a Rs 4,600-crore (Rs 46 billion) general refinance kitty. The bank rate was raised to 11 per cent in July 1991 and further to 12 per cent in October 1991 against the backdrop of high inflation and a difficult balance of payments. The rate stood at that level for nearly six years despite changes in various economic parameters
The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system.
it's the repo rate -- or the rate at which the central bank borrows money to suck out short-term liquidity from the system -- that is emerging as an important signal for bankers to adjust interest rates. the bank rate is losing its relevance as a signalling device
Indeed, there have been occasions when bankers refused to cut their prime lending rates in response to a bank rate cut. It is another matter that as a concept PLR too is losing its relevance with most borrowers raising bank loans at below PLR. Lending rates now depend on the cost of funds, not the bank rate. The cost of funds is decided by market forces which, to a large extent, are guided by the short-term repo rate.
Ever since the bank rate was reactivated in April 1997 by former Governor C Rangarajan as the most powerful indirect tool of monetary control, the central bank's monetary policy has rested on the tripod of the CRR, repo rate and bank rate.
The bank rate was raised to 11 per cent in July 1991 and further to 12 per cent in October 1991 against the backdrop of high inflation and a difficult balance of payments. The rate stood at that level for nearly six years despite changes in various economic parameters. Till 1997, the bank rate had little operational significance since the refinance rate was fixed at a lower level. Rangarajan felt it was necessary to make the bank rate an effective signal rate as well as a refinance rate. So he brought down the bank rate to the level of the export refinance rate since the latter was blunting the efficacy of the signal rate
Ideally, when the central bank moves the bank rate, like the discount rate in the US, all rates in the economy should move in tandem. Bankers expect a rate cut to signal a general downward trend in interest rates which was flagged off by Finance Minister Jaswant Singh in the Union Budget. But the point to note is that it was the repo rate that the RBI cut (along with the savings bank rate) hours after the Budget was presented on February 28
But the point to note is that it was the repo rate that the RBI cut (along with the savings bank rate) hours after the Budget was presented on February 28. Even though the repo is a short-term instrument, this is emerging as the new anchor for the market because the yield curve of government securities or gilts is also being built on this rate. In the gilts market, in fact, it is the shortterm rates that are influencing long-term rates instead of the other way round. For instance, the repo rate -- which is effectively a one-day rate -- is pegged at 5 per cent. The overnight interbank call rate is slightly lower than the repo rate and the 91-day and 364-day treasury bill yields are around 15 to 20 basis points over the repo rate.
Credit Policy Feb 2008
?Bank rate, reverse repo rate, repo rate and cash reserve ratio (CRR) kept unchanged.
? The flexibility to conduct overnight or longer term repo including the right to accept or reject tenders under the liquidity adjustment facility (LAF), wholly or partially, is retained.
? Overall real GDP growth projection for 2007-08 at around 8.5 per cent is retained. ? The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 while conditioning expectations in the range of 4.0-4.5 per cent.
Monetary Measures
Bank Rate kept unchanged at 6.0 per cent. The reverse repo rate and the repo rate under the LAF are kept unchanged at 6.0 per cent and 7.75 per cent, respectively. The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management. CRR kept unchanged at 7.5 per cent
The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants
?
?
While non-food credit has decelerated, growth in money supply and aggregate deposits of scheduled commercial banks continue to expand well above indicative projections. High growth in reserve money is driven by large accretion to RBI's net foreign exchange assets.
Liquidity management will assume priority in the conduct of monetary policy through appropriate and timely action. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:
?
?
? As on January 4, 2008 money supply (M3) increased by 22.4 per cent on a year-on-year basis which was higher than 20.8 per cent a year ago and well above the projected trajectory of 17.0-17.5 per cent indicated in the Annual Policy Statement for 2007-08. ? Reserve money increased by 30.6 per cent on a year-onyear basis as on January 18, 2008 as compared with 20.0 per cent a year ago. ? In the current financial year, the growth in aggregate deposits of scheduled commercial banks (SCBs), on a year-on-year basis, at Rs.6,00,761 crore (25.2 per cent) was higher than that of Rs.4,44,241 crore (22.9 per cent) a year ago.
? On a year-on-year basis, non-food credit of SCBs expanded by Rs.3,82,155 crore (22.2 per cent) as on January 4, 2008 on top of the increase of Rs.4,16,418 crore (31.9 per cent) a year ago. ? The year-on-year growth in total resource flow from SCBs to the commercial sector decelerated to 21.7 per cent from 30.1 per cent a year ago. ? Banks' holdings of Government and other approved securities at 29.1 per cent of their net demand and time liabilities (NDTL) as on January 4, 2008 was marginally higher than 28.6 per cent a year ago.
External Developments
During April-November 2007, merchandise exports rose by 21.9 per cent in US dollar terms as compared with 26.2 per cent in the corresponding period of the previous year. Import growth was also lower at 26.9 per cent as compared with 27.4 per cent in the previous year. The merchandise trade deficit widened to US $ 52.8 billion from US $ 38.5 billion in the previous year. While oil imports recorded a lower growth of 9.8 per cent as compared with 42.0 per cent a year ago, non-oil imports increased by 35.3 per cent as compared with 21.3 per cent a year ago. Foreign exchange reserves increased by US $ 85.7 billion during the current financial year so far and stood at US $ 284.9 billion on January 18, 2008.
? Foreign exchange reserves increased by US $ 85.7 billion during the current financial year so far and stood at US $ 284.9 billion on January 18, 2008. ? Over the end-March 2007 level, the rupee appreciated by 9.61 per cent against the US dollar, by 8.85 per cent against the pound sterling and by 0.95 per cent against the Japanese yen, but remained unchanged against the euro as on January 25, 2008.
Developments overall domestic
? Domestic activity continues to be investment driven, supported by external demand. Building up of supply capacities, both new and existing, is strongly underway as reflected in the sustained demand for domestic and imported capital goods. ? Key indicators point to the persistence of aggregate demand pressures, including into the near-term ? There has been some improvement in the finances of the Central Government as the gross fiscal deficit has declined indicating that adherence to the Fiscal Responsibility and Budget Management (FRBM) rules in the current financial year is on track.
Stance of Monetary Policy
A disaggregated analysis of supply and demand factors across select sectors would enable appropriate public policy responses keeping in view the employment intensity of some of these sectors. Monetary policy, per se, can essentially address issues relating to aggregate demand but the associated policies in the financial sector could, to the extent possible, take account of the evolving circumstances as reflected in the disaggregated analysis. In view of the prevailing liquidity conditions and the sustained profitability of banks as reflected in net interest margins, there is a need for banks to undertake institutional and procedural changes for enhancing credit delivery to sectors that are employment-intensive
To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion. To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate
Extending the spread, the five-year paper yield is around 60 basis points over the repo rate and the 10-year paper yield 85 to 90 basis points higher at 5.85 to 5.90 per cent. In other words, even though the repo is a short-term rate, it is influencing the entire interest rate structure in the market. This is bound to happen in a liquidity surplus system where nobody borrows at the bank rate and everybody wants to lend at the repo rate. In effect, in such a situation it is the rate at which the RBI borrows from the market that becomes the anchor and not the rate at which commercial banks borrow from the RBI.
In normal circumstances, the repo rate should act as the floor for the call rates. But these are abnormal times when the RBI is lapping up every dollar from the forex market and the money used for the dollar purchase is adding to the deluge of rupee liquidity. Whether the RBI admits it or not, the repo is the new anchor for the financial system. Its sanctity can be preserved only if it is cut to a realistic level (around 4.5 per cent or so). The bank rate and CRR cut can, at best, complement it.(this article appeared in 2004}
Banking Industry Return on Asset %
Country France Germany 1986 0.35 0.81 1988 0.38 0.73 1990 0.25 0.63 1992 0.23 0.51 1993 -0.03 0.55
Italy
Spain U.K.
1.20
0.81 1.19
0.91
1.36 1.51
1.18
1.53 0.71
0.92
1.56 0.44
0.99
0.09 0.75
United States non financial companies’ financial structure (%)
Type of Instrument US bank loans Commercial paper Loans, finance companies Bonds Mortgages 1965 57.3 1.7 5.2 25.6 11.7 1980 48.7 6.9 3.7 66.6 -36.2 1984 28.9 12.7 9.7 39.3 -0.8 1988 16.5 5.9 8.0 57.8 7.1 1989 16.5 10.6 5.7 57.7 2.3
Mergers and acquisitions in EU (No. of Transactions)
Sector Banks Insurance Other Financial companies 1984 52 24 76 1989 239 101 340
doc_320559449.ppt