Rise of American Accounts. "Hollywood. "

PROHIBITORY FUNCTIONS OF RBI

Being the central bank of the country, the Reserve Bank (a) should not compete with member banks and (b) should keep its assets in liquid from to meet any situation of economic crisis. Therefore, the Reserve Bank has been prohibited to do certain type of business.

(1) Reserve Bank can neither participate nor provide any direct financial assistance to any industry, trade or business.

(2) It can not purchase its own shares.

(3) It can not purchase shares of any commercial or industrial undertaking and any other banking company.

(4) It can not purchase immovable property except for the establishment of its offices.

(5) It cannot give interest on deposits held by it.

(6) It can not give loans on the security of shares and immovable property.

(7) It cannot draw or accept bills not payable on demand.

MONETARY POLICY / CREDIT CREATION AND CONTROL

"Monetary policy refers to the use of official instruments under the control of the central bank to regulate the availability, cost and use of money and credit with the aim of achieving optimum levels of output and employment, price stability, balance of payments equilibrium or any other goals set by the state. "

The most important function of the Reserve Bank of India is to control the credit creation power of the commercial banks operating in the country in order to control inflation and deflation in the economy of the country.

The capacity of the banks to provide credit depends upon the cash resources i.e. cash balances in hand and with the RBI. The cash resources increase through a rise in the deposit resources of banks, or by their borrowing from the Reserve Bank of India, or by sale of their investments. Regulation of credited by the Reserve Bank of India in essence means regulation of the quantum of these reserves of the banks. If RBI desires to bring about an expansion of credit, it will adopt measures which will increase banks reserves, and likewise if credit is to be restricted, it will attempt to curtail reserves.

Legal Basis. The statutory basis for the regulation of the credit system by the Bank is embodied in the Reserve Bank of India Act and the banking (Companies) Regulation Act. The former Act confers on the Bank the usual powers available to central banks generally, while the later provides special powers of direct regulation of the operations of commercial and Co-operative banks. In considering the usual instruments of what is known as general or quantitative credit control, viz., the Bank rate , (also known as discount rate), open market operations and variable reserves requirements, it is important to stress that these are closely inter-related and have to be operated in co-ordination. All of them affect the level of bank reserves. Open market operations and reserves and reserve requirements directly affect the reserves base while the Bank rate produces its impact indirectly through variations in the cost of acquiring the reserves. The use of one instrument rather than another at any point of time is determined by the nature of the situation and the range of influence it is desired to wield as well as the rapidity with which the change is required to be brought about. Open market operations, for instance, are suited to carry out day-to-day adjustments on even the smallest scale. Changes in reserve requirement produce an impact at once and would affect bank's generally. The effects of Bank rate changes are not confined to the banking system and the short-term money market alone. They produce wider repercussions on the economy as a whole.

The instruments refered above are known as general or quantitative techniques or instruments of monetary policy. In addition, the RBI can use selective or qualitative techniques of control.

It may be clarified that general techniques affect the volume of credit, hence the money supply by affecting the lendable resources of the banks. On the other hand, selective credit control techniques are aimed at the 'directions of the credit ' rather than on the 'volume of credit. '

Now we proceed to discuss the policy and the use of the techniques by the Reserve Bank of India.

Credit Control Measures

The measures / techniques of credit control used by RBI can be divided into two types :

1. Quantitative credit control.

2. Qualitative credit control.

The main objective of quantitative credit control is to have a control over the total quantity of credit in the country. For quantitative credit control, the Reserve Bank of India employs bank rate, cash reserve ratio, statutory liquidity ratio and open market operations. Whereas, rationing of credit, moral suasion, variation in margin requirements, publicity etc. are used as qualitative credit control methods.

A. Quantitative Credit control

1. Bank Rate.

The Bank rate is defined in Section 49 of the Reserve Bank of India Act as 'the standard rate which it (the Bank) is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under this Act'. In the absence of a developed bill market this has not been truely operative. It is the rate on advances by the bank that is important and has been commonly treated as the equivalent of bank rate. Viewed in the broad sense of the rate on the bank's accommodation, the bank rate so defined is of some significance since it forms the basis for the rates at which the Bank grants advances to various types of borrowers, including Government.

In simple words, it is the rate at which the central bank of the country makes advances to the banks against approved securities or rediscounts the eligible bills of exchange and other papers. The purpose of change in this rate is to make the accommodation from the central bank cheaper or expensive depending upon whether the purpose is to expand or contract credit. It is a signal to the money market regarding the relaxation or restraint in the policy.

(a) Expansion of Credit /Credit Creation. It is the oldest method by RBI to control credit in the country. The bank rate is the rate changed by RBI for rediscounting the bills of exchange from the commercial banks. If RBI objective is to expand the credit in economy. It makes it easy for the commercial banks to have more credit by lowering the bank rate. It leads to borrowing from Reserve Bank more cheaper and the commercial banks will borrow more from RBI. In turn, commercial banks will borrow more from RBI. In turn, commercial banks provide loans to the public at lower rates of interest thus increasing the borrowings by the public. Lowering bank rate, therefore, encourage business activity and credit will be expanded.

(b) Contraction of Credit. The Reserve Bank raises the bank rate with the objective to contract credit in the economy. Increase in bank rate leads to increased cost of borrowings for the commercial banks from the RBI. As a result, the commercial banks also raise their lending rates for the customers .Because of the decreased supply of money in the money market, the rate of interest in the market rises. This results in decreased borrowings by the public resulting in contraction of the credit.

The efficacy of the bank rate instrument continues to evoke considerable controversy not only among academic people but also in central banking circles. In the developing countries, and the developed countries too, fiscal policies and direct control measures have far greater impact on fixed investment decisions than the discount rate changes. Even in the case of inventory accumulation, the bank rate will be effective only if the bank rate change is sharp and credit interest rates are sufficiently high to make inventory accumulation unattractive. On the other hand, discount rate changes have an impact on the movement of short-term funds to and from the country but in the developing countries generally such movements are of modest dimensions and can be largely regulated through the device of exchange control. Discount rate relaxation of credit policies. In the developed countries, in recent years discount rate changes have been both frequent and sharp. The approach of the Reserve Bank of India so far has been to make a modest use of this instrument.

Between 1935 and 1962 the bank rate was changed only three times. It was reduced from 3.5% to 3% in November 1935, was again increased to 3.5% in November 1951 and was further raised to 4% in May 1957. Between 1962 to 1973 there were frequent changes in the bank rate. It was enhanced to 4.5% in Ianuary 1963 to 5% in September 1964 and to 6% in February 1965. In September 1964, the differential interest rate on borrowings from the R. B. I. was introduced. In March 1968 in the face of recessionary trends, the rate was reduced to 5% .Subsequently it was increased to 6% in January 1971 and to 7% in May 1973, to 9% in July 1974 and to 10% in July 1981. During 1991 it was increased to 11 percent in July and 12 percent in October. Thereafter, it remained unchanged till 1997.

In April 1997, the bank rate was reduced to 11percent. In post 1997, period the banks rate has been once again used as an instrument in the credit policy of the country. In phases it has been brought down from 11percent in March, 1998 to 9 percent in April 1998.

In April 2000, it was brought down to 7 percent, to 6.5% in October, 2001, to 6.25% in October, 2002. Due to factors like availability of specific refinance facility availability to commercial banks and bill market scheme etc., the bank rate in India has not been the 'pace setter' to other market rates of interest. The money market rates do not automatically adjust to the bank rate. Thus, it has not been a very effective instrument of monetary policy in India. However , the things are changing now.

2. Variable Reserves Requirements

Through this technique, the central bank of a country can change the 'excess cash reserves' positions of the banks and hence their credit creation capacity. It can be applied in various forms to various categories of deposits. This is a more effective tool of monetary policy as compared to bank rate and open market operations.

The Reserve Bank of India has used two methods of (1) Cash reserves ratio and (2) Statutory Liquidity ratio for regulating the credit base of the banks.

(1) Cash Reserve Ratio

Changes in the bank rate and purchase and sale of securities in the open market produce only marginal changes in the cash reserves of the commercial banks and indirectly in the credit creation by banks. But cash reserve ratio is more direct and effective method of exercising credit control.

All the commercial banks are required to maintain a minimum percentage of its deposits with the Reserve Bank. The reserves in excess of the minimum requirements can be utilised by commercial banks to extend credit, smaller are the reserves, lesser is the power of the commercial banks to create credit, smaller are the reserves, lesser is the power of the banks to create credit.

(a) Expansion of Credit. Whenever the Reserve Bank wants to expand credit in the economy, it lowers the reserve ratio, so that credit creation power of the banks is enhanced. Because, commercial banks will be required to maintain lesser amount of cash reserves with RBI and excess reserves can be utilised to create credit.

(b) Contraction of Credit. Whenever Reserve Bank wants to contract credit, it raises the cash reserve ratio to be followed by commercial banks. This results in increase in cash reserves required to be maintained/deposited with RBI and lesser reserves for creation of credit by commercial banks.

Originally, Section 42(1) of the R.B.I., Act required banks to maintain a minimum cash reserves of 5% of their demand liabilities and 2% of time liabilities in India. The Act was amended in 1956 empowering the R.B.I to vary the minimum reserves between 5% to 20% for demand liabilities and between 2% to 8% for time liabilities of the banks in India. The Act was again amended in 1962, removing the distinction between time and deposit liabilities and authorised the Bank to vary the cash reserves ratio between 3% to 15%.

The Reserve Bank of India did not use the power till 1972-73 .In June 1973, the ratio was raised from 3% to 5% . It was increased to 6% on September 8,1973 and to 7% on September 22, 1973. The impounded cash reserves of 2% of June 1973 were released in June 1974. ' The R.B.I again increased the ratio to 5% in September 1976 and to 6% in November 1976. In July - August 1981, the ratio was increased to 7% in two phases. However, because of the difficult situation it was reduced to 7.25% in April 1982, it was further reduced to 7% .Again in two phases it was raised to 8% by July 1983.

After the beginning of the process of liberalisation of the economy the CRR has been changed more frequently. From 1991 to April 1988 ,the CRR has been changed 26 times. In fact, between October 97 and April 98 ,it has been changed 6 times. In January 1998, the CRR was increased from 10 to 10.5 percent to check the downslide in rupee-dollar rate. It was reduced to 10 percent again in March, 1998. By April 2000, it was brought down to 7 percent and to 5 percent by April 2002. However, the cash reserve ratio has been increased to 7.75% w. e. f. January 17,2009 .However, it was once again increased to 5.75% in March 2010 and further to 6 percent w. e. f April 24,2010. The CRR has been kept at 4.75 percent of net demand and time liabilities (NDTL) of scheduled bank's as per the annual monetary policy 2012-13.

Trapore Committee on Capital Account Convertibility has recommended that the CRR should be brought down to 3 percent. Once it is scaled down to 3 percent it will virtually cease to be an instrument of liquidity control.

(2) Statutory Liquidity Ratio.

Under the Banking Companies Regulation Act, banks were required to maintain liquid assets equal to 20% of their total demand and liabilities. So, when the variable cash reserves ratio was increased, the banks used to dilute the impact by liquidating excess liquid assets. To check this exercise, the Act was amended in 1962 requiring banks to maintain liquid assets equal to 25% of the time and demand liabilities in addition to cash reserve ratio.

In a phased manner the ratio was increased to 35% by October 1981. Subsequently it was gradually increased to 38.5 percent. But under new economic policy, with a view is increase funds with banks the trend has been to reduce it.

In April, 1996 the effective SLR of the scheduled commercial banks was estimated to have fallen to 28 percent of their total net demand and time liabilities. The average SLR was estimated to be 27 percent in December 1996. Since, the banking sector deposits were exempted on April 15, 1997 the average SLR has gone down below this level. In March 1998, the effective SLR has come down to 25 percent, in accordance with recommendations of Narsimham Committee. However, the SLR was reduced to 24 percent w. e. f. September 2008.

3. Open Market Operations.

Open market operations refer broadly to the purchase and sale by the Central Bank of a variety of assets such as foreign exchange, gold, government securities and even company share. In practice, however, these are confined to the purchase and sale of Government securities.

Originally, there was a ceiling on the RBI 's holdings of Government securities. There were also restrictions on its holdings of different maturities. This obviously, restricted the open market operations of RBI. These restrictions were removed in 1951. At present, Section 17(8) of the Reserve Bank of India Act, authorise the bank to engage in the purchase and sale of the securities of the Central Government or a State Government of any maturity or of such securities of a local authority as may be specified in this behalf of the central Government on the recommendations of the Central Board. The securities fully guaranteed as to the principal and interest by the government or authority. Thus, today there is no restriction as to either the quantity or maturity of the securities, which the bank can purchase or sell.

The desired objective of increased credit creation by commercial banks or contraction of credit can be achieved by sale or purchase of securities in the open market.

(1) Expansion Credit Creation. In order to increase money supply in the market, RBI starts purchasing securities in the open market. Borrowings in money market became cheaper due to increased supply of money. People are encouraged to borrow more and more money is deposited in banks by people. This raises the cash reserves of the commercial banks and also enhance their ability to create more credit.

(2) Contraction of Credit. In order to contract the credit, Reserve Bank starts selling the securities in the open market. People wanting to buy the securities utilise either the cash holdings or withdraw the cash from commercial banks, which leads to depletion of cash reserves with the commercial banks. It reduces the credit creation power of the banks. Therefore, credit is contracted.

The capacity of a central bank to conduct open market operations depends on the quantity and type of assets it can hold in its ' portfolio and the size and depth of gilt edged market. However, the Indian gilt edged market has been narrow. A sizeable proportion of the public debt has been held by a few large institutions. Further, the volume of transactions in the securities market for the purpose of changing their portfolio has been limited. This has prevented large scale operations by RBI, as it tends to unduly disturb the security prices.

In India, the open market operations have not been used much to influence the cash reserves of banks. The main objective has been to assist debt operations of the Government and the seasonal needs of the banks. However the operations have been in tune with monetary policy of the RBI. The open market operations of the RBI have been inhibited by number of such factors. It has not been a very effective instruments of monetary policy.

The inflow of foreign exchange increased considerably after 1991.This brought more liquidity into the system. In view of this, the Reserve Bank of India resorted to large scale open market operations. The deregulation and liberalisation of the system has led to the emergence of open market operations as an important instruments in the conduct of the monetary policy. In the early months of 1998 ,the open market operations of the Reserve Bank, in the form of outright sales of Government Securities and repo and reverse repos operations, have gained considerable momentum.

The primary objective of these operations is to absorb or provide liquidity in the market. Although under certain circumstances repos have also been used to signal changes in interest rates. In the monetary policy of 1998-99 ,the announcement has been made about the introduction of one day repos. This is termed as the most important tool. The indications are that it will ultimately replace the CRR as a tool of monetary control. The CRR is to be reduced to 3 percent in accordance with recommendations of Tarapore Committee.

B. Selective And Direct Credit Control

The instrument of credit control discussed in the foregoing paragraphs are commonly known as general or quantitative methods of credit control while the regulation of credit for specific purposes or branches of economic activity is termed as selective or qualitative credit control. While general credit controls operate on the cost and total volume of credit, selective controls relate to the distribution or direction of available credit supplies. It may be mentioned that some element of selectivity can be imparted to general credit controls also by giving concessions to priority sectors or activities, this has been so in India. The aim of selective controls is to discourage such forms of activity as are regarded to be relatively unessential or less desirable. Selective credit controls have been used in Western countries to prevent the demand durable consumer goods outrunning the supply and generating inflationary pressures. In the USA., they have been used to regulate stock market credit also. In India such controls have been used to prevent speculative hoarding of commodities like foodgrains and essential raw materials to check an undue rise in their prices.

Selective credit controls are considered as a useful supplement to general credit regulation. From available experience, it appears that their effectiveness is greatly enhanced when they are used together with general credit controls. They are designed specifically to curb excesses in selected areas without affecting other types of credit. They attempt to achieve a reasonable stabilisation of prices of the concerned commodities through the demands side, by regulating the availability of bank credit for purchasing and holding them. It should, however, be noted that prices are determined by the inter-action of supply and demand and when supply is substantially short, what selective credit controls are likely to accomplish is to moderate the price rise rather than arrest the basic trend.

Legal Basis. The Reserve . The Reserve Bank of India is vested with the power to exercise selective control under Section 21 and 35A of the Banking Companies Regulation Act. It is empowered to determine the policy in relation to advances to be followed in the interest of public deposits or banking policy. Furthermore, the RBI is empowered to determine the policy in relation to advances to be followed in the interest of public deposits or banking policy. Furthermore, the RBI is empowered to give directions to bank or banks on various aspects of credit e. g.

(1) the purpose of the credit.

(2) the margins to be maintained.

(3) the maximum advances that can be made.

(4) the rate of interest and other terms and conditions on the basis of which advances may be made.

All the banks are under obligation to follow instructions of the Reserve Bank. It is also authorised to prohibit bank or bank's from entering into a particular transaction or class of transactions. Now we discuss some of the selective measures of the RBI.

Measures

(1) Directions. Before 1956 ,the need for selective control measures was not felt. The excessive use of credit for speculative purposes forced the Reserve Bank of India to use its powers. It directed the banks to send their fortnightly returns on advances. The banks were directed to use restraint in advancing loans against the security of foodgrains. The security margin requirements were enhanced. Subsequently, it directed the banks not to advance loans for the purchase of consumer goods. Under the Credit Authorisation Scheme of 1956, the RBI not only controlled the quantum of credit but also the terms and conditions of flow of credit particularly to large borrowers. It has been issuing and arising its ' instructions from time to time.

With a view to de-regulate and liberalise the financial system of the country RBI has taken number of steps since 1987. The Credit Authorisation Scheme was abolished in 1988. Instead of Credit Authorisation Scheme it has evolved Credit Monitoring Arrangement under which it will monitor the credit sanctions.

In recent years RBI resorted to selective monitor and determine the impact demand originating from bank credit.

(2) Rationing. In 60's the Reserve Bank of India used rationing of credit to channelise flow of credit into desired areas. Under rationing quota system is adopted according to the needs of the economy. In a 'priority sector' quota works at rationing of credit.

(3) Margin Requirements. Changing margin requirements is another method followed by the Reserve Bank of India. By requiring higher margin ,while accepting a commodity as a security it can decrease the flow of credit into a particular trade or vice versa. The method has been used since 1950's in providing credit against food grains or agricultural produce. An example of this is providing credit against food grains or agricultural produce. An example of this is providing credit against food grains or agricultural produce. An example of this is the monetary policy for 1998-99. The policy has increased the ceiling on loans against shares from 10 lacs to 20 lacs in case of dematerialised shares. Further, the margin has also been reduced from 50 percent to 25 percent in case of dematerialised shares. The purpose is to encourage dematerialisation of shares i.e. replacing paper share certificates with entries of shares held with depositories. The transfer is electronic in case of dematerialised shares.

(4) Moral Suasion. In addition to the above mentioned methods of credit control, both quantitative and qualitative, it may be noted that use has also been made in this country of moral suasion. Periodically, letters are issued to banks urging them to exercise control over credit in general or advances against particular commodities or unsecured advances. Discussions are also held with bankers for the same purpose. Such discussions between the Bank and the commercial banks have been frequent in the last twenty years. The Bank has been able to build up over the years good informal relations with banks. Moral suasion, backed as it is by the Bank's vast powers of direct regulation, has proved quite useful. The use of this instrument is facilitated by the concentration of banking business in the hands of about twenty eight bank's. The nationalisation of the major Indian scheduled commercial banks enhanced the efficacy of this instrument.

The Reserve Bank of India has used the tool quite effectively due to its good rapport with the banking system. At times it persuaded bank's to maintain higher statutory liquidity ratio then legally required e. g. in 1982 bank's maintained a statutory liquidity ratio then legally required e. g. in 1982 bank's maintained a statutory liquidity rates (SLR) of 35% against legal requirement of 25%. Moral suasion has been used effectively to check non-food credit expansion.

Upto 90's selective controls was found to be more useful by Reserve Bank of India as compared to direct controls. However, as a part of liberalisation policy, lesser reliance is being placed on instruments of selective credit control.

Significance of Monetary and Credit Policy

The bi-annual Monetary and Credit Policy is a statement that determines the supply of money in the economy and the rate of interest charged by banks. Through this policy, the RBI tries to maintain price-stability in the economy by controlling money supply, interest rates and inflation. In banking and economic terms money supply is referred to as M3 which indicates the level (stock) of legal currency in the economy. Besides, RBI also announces various norms to be followed by the banking and financial sector and the institutions which are governed by it. The objectives of monetary policy are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.

Monetary Policy V/S Fiscal Policy

The Monetary Policy is different from fiscal policy as the former brings about change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool of the government. It is used to overcome recession and control inflation. Fiscal policy may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. The monetary policy regulates the supply of money and the cost and availability of credit in the economy. Formulated and implemented by the RBI, the policy can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.

Monetary Policy's importance is discussed as below:

Importance to individual. The policy gains importance to the individuals due to announcements in the interest rates. The rates of interest announced by RBI effect the interest costs of the banks directly. A reduction in interest rates would force bank's to lower their lending rates and borrowing rates. So, if any individual wants to deposit money with a bank or take a loan, he would get a lower rate of interest.

Importance to Corporates. If there is an increase in interest rates, banks would immediately increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs of the Corporates and as a result their profits, the monetary policy is very important to them also.

Importance to Exporters. Exporters are also interested in monetary policy announcements regarding export refinance, or the rate at which the RBI will lend to banks which have advance pre shipment credit to exporters. A lowering of these rates would mean lower borrowing costs for the exporter.

Impact on Stock Market. The RBI's policies have direct impact on volatile foreign exchange and stock markets. The factor connecting money and stocks is interest rates. People save to get returns on their savings. In realistic market conditions, any hike in interest rates would tend to suck money out of shares into bonds or deposits, and any fall would have the opposite effect.

MONETARY POLICY, 2012-13.

RBI Governor, Dr.D.Subbarao announced the Monetary Policy, 2012-13 on April 17, 2012. The challenge for the new monetary policy is to maintain its vigil on controlling inflation while being sensitive to growth and other vulnerabilities. After raising the policy rate by 375 basis points during March 2010-October 2011 to contain inflation and anchor inflation expectations, the Reserve Bank paused in its mid-quarter review of December 2011. Subsequent growth-inflation dynamics prompted the RBI to indicate that no further tightening was required and that further actions would be towards lowering the rates.

Against the backdrop of global and domestic macroeconomic conditions, outlook and risks, the policy stance for 2012-13 has been guided by two major conditions :

(1) First, growth deccelarated to 6.1 percent in quarter 3 of 2011-12.

(2) Second, headline wholesale price index (WDI) inflation as well as non-food manufactured products inflation moderated by March 2012 driven largely by moderation in the core components reflecting a slowdown in demand.

The stance of the monetary policy 2012-13 intended to :

(a) Adjust policy rates to levels consistent with the growth moderation.

(b) Guard against risks of demand-led inflationary pressures re-emerging.

(c) Provide a greater liquidity cushion to the financial system.

Monetary Measures

On the basis of the key objectives outlined above, the following policy measures have been announced :

1. Repo Rate. It has been decided to reduce the repo rate under liquidity adjustment facility (LAF) by 50 basis points from 8.5 percent to 8.0 percent.

2. Reverse Repo Rate. The reverse repo rate under the LAF has been adjusted to 7.0 percent.

3. Bank Rate. The Bank Rate stands adjusted to 9.0 percent with immediate effect.

4. Cash Reserve Ratio. The cash reserve ratio (CRR) of scheduled bank's has been retained at 4.75 percent of their net demand and time liabilities (NDTL).

5. Marginal Standing Facility. In order to provide greater liquidity cushion, it has been decided to :

(a) Raise the borrowings limits of scheduled commercial banks under the marginal standing facility (MSF) from 1percent to 2 percent of their NDTL outstanding at the end of second preceeding fortnight.

(b) Banks can continue to access the MSF even if they have excess statutory liquidity ratio (SLR) holdings, as hitherto.

(c) The MSF rate, determined with a spread of 100 basis points above the repo rate has been adjusted to 9.0 percent with immediate effect.

MONETARY POLICY, 2013-14

RBI Governor, Dr. D. Subbarao announced the Monetary, Policy, 2013-14 on May 3,2013.

Sticking to its cautions stance, the Reserve Bank cut the key interest rate by just 0.25% to 7.25% and kept the liquidity enhancing cash reserves requirement unchanged, disappointing the industry and stock market.

The RBI in its annual monetary policy statement said there would be modest improvement in the country's economic growth to 5.7% in the current fiscal, as against the decade's low of 5% in 2012-13.

Justifying the limited easing, RBI Governor D Subbarao said the "monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment. " The upside risks to inflation, which cooled to a three-year low in March, "still remain significant" in the near term on suppressed inflation on the energy front, Subbarao added.

Monetary Policy Stance

The policy document spells out the three board contours of our monetary policy stance. These are :

(1) first, to continue to address the accentuated risks to growth :

(2) second, to guard against the risks of inflation pressures re-emerging and adversely impacting inflation expectations, even as corrections in administered prices release suppressed inflation, and

(3) third, to appropriately manage liquidity to ensure adequate credit flow to the productive sectors of the economy.

Highlights of the Monetary Policy, 2013-14

(1) RBI cuts short-term lending rate by 0.25 percent, keeps CRR unchanged.

(2) RBI pegs economic growth for current fiscal at 5.7 percent.

(3) Headline inflation to remain range-bound around 5.5 percent level in 2013-14.

(4) RBI proposes doubling of priority sector lending limits to MSME s to Rs 5 crore.

(5) CAD is the biggest risk to the economy. There is a likehood of capital flight due to growth concerns in advanced economies.

(6) Banks are not carrying out customer due diligence while marketing and distributing third-party products.

(7) Growth-inflation dynamics limits scope for further monetary easing.

An Evaluation of Monetary Policy

It is very difficult to make a comprehensive evaluation of the monetary policy of RBI for number of reasons like (1) under-developed money market, (2) presence of black money, (3) role of unorganised sector, (4) difficulty in reconciling conflicting objectives (5) importance of non-monetary factors, (6) little integration of various components of financial markets (7) lack of banking habits in a section of the population. In pre 1991 most of the monetary instruments have not been used actively.

The main objective of the monetary policy has been 'Controlled expansion '. Which means controlled expansion of money supply ensuring stability of prices. The RBI has used both quantitative as well as qualitative methods to achieve its goal. In a agrarian economy seasonal needs of credit are different. The monetary policy has always been influenced by these needs.

It introduced Bill market scheme to expand credit to industry and has been trying to develope Bill Market to facilitate implementation of the monetary policy.

The Government of India also created problems for proper implementation of the monetary policy as most often it failed to restrict its borrowings from the RBI to pre-determined levels. This resulted into monetisation of debt, which is inherently inflationary. In tune with Chakravarty Committee recommendations, some steps have been taken recently. Ad hoc treasury bills have been abolished with effect from 1stApril, 1997. The yield on Government dated securities has been made more attractive. The targetted expansion of money supply during the year is also being announced in the beginning of the year.

The monetary policy statements have also been focussing on structural and institutional reforms. The makers of the monetary policy are more convinced that monetary measures have to be used as and when economic and financial circumstances demand for it. This can not be linked with policy announcements in April-May and October-November every year. The fine tuning of measures can take place at any point of time. This has brought down the importance of annual and mid-term policy announcements.

In India, the instruments if monetary policy have been used more in 1980 and 1990, as compared to 1970's. The bank rate was changed 5 times between 1970 to 1980. It was changed only once between 1980 to 90. However, it was changed 15 times between 1990-2000. This shows that in post liberalisation period, bank rate is being used more often than earlier period.

CRR was changed 11 times during 1970-80 and 31 times during 1980-90 and 29 times between 1990-2000. In 1980's it was increased more to contain inflationary tendencies emerging out of excessive Govt. borrowing. In 1990's it was slowing being reduced in accordance with objectives of reforms in the financial sector.

SLR was changed 7 times during 1970-80, 8 times during 1980-90 and 12 times during 1990-2000. SLR was increased to the level of 38.5 percent during 1980-90, to fund the needs of the Govt .During 1990-2000, it was reduced to 25 percent in accordance with Narsimham Committee recommendations.

In the light of recommendations of various committees the country in witnessing -

(a) deregulation of interest rates.

(b) substantial reduction in SLR and CRR.

(c) lesser recourse to RBI by the Govt.

(d) greater autonomy for banks.

(e) greater integration of various segments of financial markets.

(f) development of new instruments of monetary management.

All this suggests that the monetary policy will be more effective in future.

Recommendations of Committe to Review the Working of the Monetary System (1985) - ( Sukhmoy Chakravarty Report)

The Committe appointed by the RBI in 1982 and headed by Sukhmoy Chakravarty to review the working of the monetary system submitted its report in 1985. Some of its main recommendations are discussed below :

(1) Proper co-ordination between monetary system and Five -year Plans. The working of the monetary system must be according to the development strategies of the five year plans. Therefore it should aim to perform the following tasks

(a) mobilise the savings of the community and enlarge the financial savings pool.

(b) promote efficiency in the allocation of the savings of the community to relatively more productive purposes.

(c) enable the resource needs of the government to be met adequately.

(d) promote price stability.

(e) promote an efficient payment system.

(2) Promote price stability. To maintain a viable balance of payments position, it is essential to maintain only reasonable increase in prices. This should be the major role of the monetary authority. This will require reduction of credit to the government and monetisation of the debt.

(3) Proper matching between authority and responsibility. There should not be any mis-match between authority and responsibility of the RBI in supervision and control over the functioning of monetisation system.

(4) Strengthen credit delivery system to priority sector. The credit delivery system should be strengthen with a view to provide adequate and timely credit to 'target groups' covered under priority sector lending. There should not be any undue emphasis on grant of credit on concessional sales. This could be counter productive.

(5) Need for 'monetary budget' and 'credit budgeting ' to achieve sectoral credit allocation should continue. It would be necessary to have an ' aggregate monetary budget annually as also for the period of five year plan, As part of the monetary budget a credit budget is to determine the permissible level of bank credit to the commercial sector. It gives a profile of sectoral deployment of the credit.

(6) Monetary targeting. Monetary targeting should be adopted as an important tool of monetary policy. The setting up of the monetary targets i.e. targets of monetary growth should be in the form of 'range' rather than 'specific magnitude'. The monetary targets should take note of growth in real sector and emerging trends in output and prices. This will enable the goals of national Socio-economic policy.

(7) Improve yield on treasury Bills. There is need to improve yield on Treasury Bills. This will make it an active monetary instrument. It should constitute the ideal short term paper in the money market.

(8) Discourage use of Treasury Bills for long term finance. Treasury Bills a short term instrument. It should not be used to finance medium or long term requirements.

(9) Improve yield on dated government securities. The yield on medium and long dated government securities should be improved. The yields should be according to the expectations of the capital market with regard to the long term movement of the price level.

(10) Only two lendings rates for the priority sector. In priority sector lending there should not be more than two concessional lending rates. One rate should be equal to basic minimum lending rate i.e., (prime lending rate ) and other should be slightly lower.

(11) Facilitate use of bill finance. Despite policy actions bill market has not developed on desired pattern. The cash credit system is responsible for it. Avoidable procedural difficulties in the use of bill finance should be removed. Steps to facilitate recourse to bill finance should be taken.

(12) Minimise use of Cash Credit. The wide spread use of cash credit for providing working capital finance creates problems for supervision of end use control of bank credit also hinders the growth of bill market. The cash credit system suffers from certain drawbacks with serious implications for the monetary system. It shifts the tasks of cash management to bank from the borrower. The role of cash credit be minimised.

The committe envisaged greater role of open market operations in a restructed money market, and improved effectiveness of bank rate policy. Most of these recommendations have been implemented.

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