SL NO TITLE PAGE NO

1. INTRODUCTION 2-8

2. RESERVE BANK OF INDIA 9-10

3. MONITARY POLICY 11-25

4. DATA ANALYSIS 25-27

5. CONCLUSION 28

INDEX

pg. 1
 Chapter 1: INTRODUCTION
In the modern age, banks are the important part of man’s economic life. As
we know that finance is the life blood of the organization, banks help in providing
funds to the economy. In Modern times bank occupy pivotal position in the
development of business and industry. Finance is the life blood and controlling
nerve center of business and banks arrange right amount of finance at right time.
Today banks is such an important industry that we cannot imagine our day to day
life without bank. It has become part and parcel of our life. Modern banks are
acting as friend, philosopher and guide for the business and industry. Numerous,
varied and ever-increasing functions and services to the business and industry.
We all are aware that war devastated JAPAN and GERMANY economy was
rehabilitated and restructured only due to co-operation and support of Banks.
Banks are essential for the fast-Economic Development of the nation. Bank
is a financial institution which deals with other people’s money i.e., money given
by depositors. Banks provide number of services to its customers as well as to
economic activities. There are different kinds of bank in an economy i.e., private
bank, government bank, etc. It also helps in strengthening the commercial
activities as well as domestic processes. Bank is one of the most important aids to
trade. Banks accepts deposits, grant loans, make payment of bills, rent, etc. on
behalf of its customers.

MEANING
A bank is a financial institution that provides banking and other financial
services to their customers. A bank is generally under stood as an institution
which provides fundamental banking services such as accepting deposits and
providing loans. There are also nonbanking institutions that provide certain
banking services without meeting the legal definition of a bank.
Banks are a subset of the financial services industry. A banking system also
referred as a system provided by the bank which offers cash management
services for customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle free
but it should be able to meet the new challenges posed by the technology and

pg. 2
any other external and internal factors. For the past three decades, India’s
banking system has several outstanding achievements to its credit. The Banks are
the main participants of the financial system in India. The Banking sector offers
several facilities and opportunities to their customers. All the banks safeguard the
money and valuables and provide loans, credit, and payment services, such as
checking accounts, money orders, and cashier’s cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and
integration among finance industries have emerged, some of the traditional
distinctions between banks, insurance companies, and securities firms have
diminished. In spite of these changes, banks continue to maintain and perform
their primary role accepting deposits and lending funds from these deposits.

DEFINITION
According to Section 5(b) of The Banking Regulation Act, 1949 defines
Banking as: -
“The accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, or order or otherwise.”
Banking Regulation Act, 1949 (sec. 5(c)), has defined the banking company
as, “Banking Company means any company which transacts business of banking in
India”.

pg. 3
 The first bank in India, though conservative, was established in 1786.From
1786 till today, the journey of Indian Banking System can be segregated into three
distinct phases:
 Early phase of Indian banks, from 1786 to 1969
 Nationalization of banks and the banking sector reforms, from 1969 to 1991
 New phase of Indian banking system, with the reforms after 1991

Phase 1
The first bank in India, the General Bank of India, was set up in 1786. Bank
of Hindustan and Bengal Bank followed. The East India Company established Bank
of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as
independent units and called them Presidency banks. These three banks were
amalgamated in 1920 and the Imperial Bank of India, a bank of private
shareholders, mostly Europeans, was established. Allahabad Bank was
established, exclusively by Indians, in 1865. Punjab National Bank was set up in
1894 with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central

pg. 4
Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were set up. The Reserve Bank of India came in 1935.
During the first phase, the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were approximately
1,100 banks, mostly small. To streamline the functioning and activities of
commercial banks, the Government of India came up with the Banking Companies
Act, 1949, which was later changed to the Banking Regulation Act, 1949 as per
amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was
vested with extensive powers for the supervision of banking in India as the
Central banking authority. During those days, the general public had lesser
confidence in banks. As an aftermath, deposit mobilization was slow. Moreover,
the savings bank facility. provided by the Postal department was comparatively
safer, and funds were largely given to traders.

Phase 2
The government took major initiatives in banking sector reforms after
Independence. In 1955, it nationalized the Imperial Bank of India and started
offering extensive banking facilities, especially in rural and semi-urban areas. The
government constituted the State Bank of India to act as the principal agent of
the RBI and to handle banking transactions of the Union government and state
governments all over the country. Seven banks owned by the Princely states were
nationalized in 1959 and they became subsidiaries of the State Bank of India. In
1969, 14commercial banks in the country were nationalized. In the second phase
of banking sector reforms, seven more banks were nationalized in 1980. With
this, 80 percent of the banking sector in India came under the government
ownership.

Phase 3
This phase has introduced many more products and facilities in the banking
sector as part of the reforms process. In 1991, under the chairmanship of M

pg. 5
Narasimha, a committee was set up, which worked for the liberalization of
banking practices. Now, the country is flooded with foreign banks and their ATM
stations. Efforts are being put to give a satisfactory service to customers. Phone
banking and net banking are introduced. The entire system became more
convenient and swifter. Time is given importance in all money transactions. The
financial system of India has shown a great deal of resilience.

In India, banks are segregated in different groups. Each group as its own
benefits and limitations in operations. Each has its own dedicated target market.
A few of them work in the rural sector only while others in both rural as well as
urban. Many banks are catering in cities only. Some banks are of Indian origin and
some are foreign players.
Banks in India can be classified into: -
 Public Sector Bank
 Private Sector Bank

pg. 6
  Cooperative Banks
 Regional Rural Banks
 Foreign Banks
One aspect to be noted is the increasing number of foreign banks in India.
The RBI has shown certain interest to Involve more foreign Banks. This step has
paved the way for a few more foreign banks to start business in India.

CHARACTERISTICS/FEATURES OF A BANK

1.Dealing in Money:
Bank is a financial institution which deals with other people's money i.e.
money given by depositors.
2. Individual / Firm / Company:
A bank may be a person, firm or a company. A banking company means a
company which is in the business of banking.
3. Acceptance of Deposit:
A bank accepts money from the people in the form of deposits which are
usually repayable on demand or after the expiry of a fixed period. It gives safety
to the deposits of its customers. It also acts as a custodian of funds of its
customers.
4. Giving Advances:
A bank lends out money in the form of loans to those who require it for
different purposes.
5. Payment and Withdrawal:
A bank provides easy payment and withdrawal facility to its customers in
the form of cheques and drafts; it also brings bank money in circulation. This
money is in the form of cheques, drafts, etc.
6. Agency and Utility Services:

pg. 7
 A bank provides various banking facilities to its customers. They include
general utility services and agency services.
7. Profit and Service Orientation:
A bank is a profit seeking institution having service-oriented approach.
8. Ever increasing Functions:
Banking is an evolutionary concept. There is continuous expansion and
diversification as regards the functions, services and activities of a bank.
9. Connecting Link:
A bank acts as a connecting link between borrowers and lenders of money.
Banks collect money from those who have surplus money and give the same to
those who are in need of money.
10. Banking Business:
A bank's main activity should be to do business of banking which should not
be subsidiary to any other business.
11. Name Identity:
A bank should always add the word "bank" to its name to enable people to
know that it is a bank and that it is dealing in money.

pg. 8
 Chapter 2: RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was
established in April 1935 with a share capital of Rs. 5crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided
into shares of Rs. 100each fully paid which was entirely owned by private
shareholders in the beginning. The Government held shares of nominal value of
Rs.2, 20,000.
Reserve Bank of India was nationalized in the year 1949. The general
superintendence and direction of the Bank is entrusted to Central Board of
Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in the economic life of
the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata,
Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and
economic interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April1, 1935. The
Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

pg. 9
The Bank was constituted for the need of following:
 To regulate the issue of banknote
 To maintain reserves with a view to securing monetary stability and
 To operate the credit and currency system of the country to its advantage.

FUNCTIONS OF RBI
 Issue of Currency Notes
 Banker to The Government
 Banker’s bank And Lender of Last Resort
 Controller of Credit
 Exchange control And Custodian of Foreign Reserve
 Collection and Publication of Data
 Regulatory and Supervisory Functions
 Clearing House Functions
 Development and Promotional Functions

Of this the main function of RBI is to control the credit or supply of money in
the market credit created by banks. The RBI through its various quantitative and
qualitative techniques regulates total supply of money and bank credit in the
interest of economy. RBI pumps in money during busy season and withdraws
money during slack season.

OBJECTIVES OF RBI
 Securing monetary stability and credit system
 Regulate the issuing of bank notes
 Stabilizing internal and external value of rupee
 Developing organizes money market
 Proper arrangement of agricultural, industrial finance

pg. 10
 Chapter 3
INTRODUCTION TO MONETARY POLICY

Monetary policy is the process by which the monetary authority of a country

controls the supply of money, often targeting rate of interest for the purpose of
promoting economic growth and stability. The official goals usually include
relatively stable prices and low unemployment. Monetary theory provides insight
into how to craft optimal monetary policy. It is referred to as either being
expansionary or contractionary, where an expansionary policy increases the total
supply of money in the economy more rapidly than usual, and contractionary
policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is traditionally used to try to combat unemployment in a
recession by lowering interest rates in the hope that easy credit will entice
businesses into expanding. Contractionary policy is intended to slow inflation in
hopes of avoiding the resulting distortions and deterioration of asset values.

Monetary Policy Influences On:

SUPPLY OF MONEY
RATE OF INTEREST

Monetary policy influences the SUPPLY OF MONEY AND RATE OF INTEREST in

order to stabilize the economy at full employment or near full employment.

pg. 11
 MEANING

Monetary policy is the process by which the government, central bank, or

monetary authority of a country controls (i) the supply of money, (ii) availability of
money, and (iii) cost of money or rate of interest to attain a set of objectives
oriented towards the growth and stability of the economy.
Monetary policy rests on the relationship between the rates of interest in an
economy, that is the price at which money can be borrowed, and the total supply
of money. Monetary policy uses a variety of tools to control one or both of these,
to influence outcomes like economic growth, inflation, exchange rates with other
currencies and unemployment. Where currency is under a monopoly of issuance,
or where there is a regulated system of issuing currency through banks which are
tied to a central bank, the monetary authority has the ability to alter the money
supply and thus influence the interest rate (to achieve policy goals).
It is important for policymakers to make credible announcements. If private
agents (consumers and firms) believe that policymakers are committed to
lowering inflation, they will anticipate future prices to be lower than otherwise. If
an employee expects prices to be high in the future, he or she will draw up a wage
contract with a high wage to match these prices. Hence, the expectation of lower
wages is reflected in wage-setting behavior between employees and employers
(lower wages since prices are expected to be lower) and since wages are in fact
lower there is no demand-pull inflation because employees are receiving a
smaller wage and there is no cost push inflation because employers are paying
out less in wages.
To achieve this low level of inflation, policymakers must have credible
announcements; that is, private agents must believe that these announcements
will reflect actual future policy. If an announcement about low-level inflation
targets is made but not believed by private agents, wage-setting will anticipate
high-level inflation and so wages will be higher and inflation will rise. A high wage
will increase a consumer's demand (demand pull inflation) and a firm's costs (cost

pg. 12
push inflation), so inflation rises. Hence, if a policymaker’s announcements
regarding monetary policy are not credible, policy will not have the desired effect.
If policymakers believe that private agents anticipate low inflation, they have an
incentive to adopt an expansionist monetary policy (where the marginal benefit
of increasing economic output outweighs the marginal cost of inflation); however,
assuming private agents have rational expectations, they know that policy makers
have this incentive. Hence, private agents know that if they anticipate low
inflation, an expansionist policy will be adopted that causes a rise in inflation.
Consequently, (unless policymakers can make their announcement of low
inflation credible), private agents expect high inflation. This anticipation is fulfilled
through adaptive expectation (wage-setting behavior); so, there is higher inflation
(without the benefit of increased output). Hence, unless credible announcements
can be made, expansionary monetary policy will fail.

Definition of 'Monetary Policy'

The actions of a central bank, currency board or other regulatory
committee that determine the size and rate of growth of the money supply, which
in turn affects interest rates. Monetary policy is maintained through actions such
as increasing the interest rate, or changing the amount of money banks need to
keep in the vault (bank reserves).
Monetary Policy as per U.S Government,
In the United States, the Federal Reserve is in charge of monetary policy.
Monetary policy is one of the ways that the U.S. government attempts to control
the economy. If the money supply grows too fast, the rate of inflation will
increase; if the growth of the money supply is slowed too much, then economic
growth may also slow. In general, the U.S. sets inflation targets that are meant to
maintain a steady inflation of 2% to 3%.

Features of monetary policy

1.Active Policy:

pg. 13
 Before the advent of planning in India in 1951, the monetary policy of the
Reserve Bank was a passive, cheap and easy policy. It means that Reserve Bank
did not use the measures of monetary policy to regulate the economy. For
example, from 1935 to 1951, the bank rate remained stable at3%. But since 1951,
the Reserve Bank has been following an active monetary policy. It has been using
all the measures of credit control.
2.Overall Expansion:
An important feature of Reserve Bank’s monetary policy is that of overall
expansion of money supply. In the words of S.L.N. Sinha, The Reserve Bank ‘s
responsibility is not merely one of credit restriction. In a growing economy there
has to be continuous expansion of money supply and bank credit and the central
bank has the duty to see that legitimate credit requirements are met ‘. In fact, the
overall, trend of money supply has been one of the expansions along with an
almost continuous rise in price level.
3. Seasonal Variations
The monetary policy is characterized by the changing behavior of busy and
slack seasons. These seasons are tied to the agricultural seasons. In the busy
season there is an expansion of funds on account of the seasonal needs of
financing production, and inventory building of agricultural commodities. On the
other hand, the slack season is characterized by the contraction of funds due to
the return flow. The main reason behind this changing pattern is the requirement
of additional funds by the industrial sector. Thus, during busy season the Reserve
Bank adopts an expansionary credit policy and tightens the liquidity pressures
during the slack season.
4.Tight and Dear Monetary Policy:
In order to restrain inflation, the Reserve Bank has often adopted a tight
and dear monetary policy. A tight monetary policy implies that the rate of growth
of money supply is lowered. A dear money policy refers to increase in bank rate.
This increase in bank rate leads to an increase in the interest rates charged by the
banks.
5.Investment and Saving Oriented:

pg. 14
 The monetary policy adopted by the Reserve Bank is both investment and
saving oriented. To encourage investment, adequate funds were made available
for productive purposes at reasonable rates of interest. The Reserve Bank has also
kept the interest on deposits at a reasonable rate to attract savings.
6.Imbalance in Credit Allocation:
The monetary policy is biased towards industrial sector. Agriculture does
not get the required institutional finances. Consequently, it has to depend upon
money lenders to a considerable extent for its credit needs. The agricultural
sector has to pay high rate of interest and even then, does not get required
amount of capital. A large part of funds flows to large industries. Even small-scale
industries suffer from the inadequacy of finances. Thus, monetary policy has
resulted in imbalances in credit allocation.
7.Wide Range of Methods of Credit Control:
The Reserve Bank has used a wide range of instruments of credit control. It
has adopted all the measures of quantitative and qualitative credit controls to
meet the needs of a complex and varying economic situation.

OBJECTIVES OF MONETARY POLICY

The main objective of monetary policy in India is growth with stability.
Monetary Management regulates availability, cost and use of money and credit. It
also brings institutional changes in the financial sector of the economy. Following
are the main objectives of monetary policy in India: -
1.RAPID ECONOMIC GROWTH: - It is
the most important objective of
monetary policy. The monetary policy
can influence the economic growth by
controlling real interest rate and its
resultant impact on the investment.

pg. 15
Example: if RBI opts for a cheap or easy
credit policy by reducing interest rates,
the investment level in the economy can be encouraged.
2.PRICE STABILITY: -
All the economics suffer from inflation and deflation; it can also be
called as price stability. Both are
harmful to economy. Thus monetary
policy having an objective of price
stability tries to keep the value of
money stable. It helps in reducing the
income and wealth inequalities.
Example: - when the economy suffers
from recession the monetary policy
should be an easy money policy’ but when there is inflationary situation there
should be dear money policy ‘.

3.EXCHANGE RATE STABILITY: -

Exchange rate stability should be there into the economy to bring in
confidence to other countries for trading purpose. However, to maintain
exchange rate stability, internal price stability needs to be
maintained. A fall in exchange rate is
caused by an excess demand for
foreign exchange over its supply. In
other words, if demand for imports is
greater than the demand for exports.

pg. 16
The exchange rate will rise at the
international value of the currency will
fall. To maintain stability in the
international value of currency, a restrictive monetary policy will have to be
adopted to bring about a reduction in money supply and the imports.

4.BALANCE OF PAYMENT EQUILIBRIUM:-

Many developing countries like India
suffer from the disequilibrium in the
balance of payment. The RBI through
its monetary policy tries to maintain
equilibrium in the balance of payment.
• Aspects:
1. BOP surplus. (Excess money supply in the domestic economy).
2. BOP deficit. (Stringency of money).

5.FULL EMPLOYMENT: -
These days, the most important objective of monetary policy is
attainment of full employment with
consideration of inflation. The
objectives of price and exchange
rate stability have been given a
secondary importance these days.
The policy of full employment can be
pursued through monetary

pg. 17
measures as they can help in
achieving and maintaining the rates
of savings and investment at a level,
which would ensure full employment. For this, monetary policy may help in
raising the aggregate rate of savings and proper channelization of savings to
desirable directions of investments. Several monetary measures can be adopted
for raising the level of savings. The rates of interest may be increased and banking
facilities may be expanded. Similarly, for boosting investment, bank credit may be
offered for investment. Besides, monetary instruments may be, used to ensure
that the banking system contributes to financing the planned public investments.
For example, in India SLR is used to ensure that a good part of the savings
mobilized by the banking system are invested in Government securities and
approved securities for financing vital investment projects.

•Example: if monetary policy is expansionary then credit supply can

be encouraged. It could help in creating more jobs in different sectors of the
economy.

6.NEUTRALITY OF MONEY: -
Economists such as Wicked, Robertson have always considered money as a
passive factor. According to them, money should only play a role of medium of
exchange and not more than that. Therefore, monetary policy should regulate the
supply of money. The change in money supply creates monetary disequilibrium.
Thus, monetary policy has to regulate the supply of money and neutralize the
effect of monetary expansion. However, this objective of monetary policy is
always criticized on the ground that if money supply is kept constant then it
would be difficult to attain price stability.

7.EQUAL INCOME DISTRIBUTION: -

pg. 18
Monetary policy can make special
provisions for the neglect supply such
as agriculture, small scale industries;
village industries etc. and provide them
cheaper credit for longer term. Thus
monetary policy helps in reducing
economic inequalities among different
sections of society.

TYPES OF MONETARY POLICY

In practice, to implement any type of monetary policy the main tool used is
modifying the amount of base money in circulation. The monetary authority does
this by buying or selling financial assets (usually government obligations). These
open market operations change either the amount of money or its liquidity (if less
liquid forms of money are bought or sold). The multiplier effect of fractional
reserve banking amplifies the effects of these actions.
Constant market transactions by the monetary authority modify the supply
of currency and this impacts other market variables such as short-term interest
rates and the exchange rate.
The different types of policy are also called monetary regimes, in parallel to
exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The
Gold standard results in a relatively fixed regime towards the currency of other
countries on the gold standard and a floating regime towards those that are not.
Targeting inflation, the price level or other monetary aggregates implies floating
exchange rate unless the management of the relevant foreign currencies is
tracking exactly the same variables (such as a harmonized consumer price index).

Inflation Targeting

pg. 19
Under this policy approach the
target is to keep inflation, under a
particular definition such
as Consumer Price Index, within a
desired range.
The inflation target is achieved
through periodic adjustments to the Central Bank interest rate target. The
interest rate used is generally the interbank rate at which banks lend to each
other overnight for cash flow purposes. Depending on the country this particular
interest rate might be called the cash rate or something similar.
The interest rate target is maintained for a specific duration using open
market operations. Typically, the duration that the interest rate target is kept
constant will vary between months and years. This interest rate target is usually
reviewed on a monthly or quarterly basis by a policy committee.
Changes to the interest rate target are made in response to various market
indicators in an attempt to forecast economic trends and in so doing keep the
market on track towards achieving the defined inflation target. For example, one
simple method of inflation targeting called the Taylor rule adjusts the interest rate
in response to changes in the inflation rate and the output gap. The rule was
proposed by John B. Taylor of Stanford University.

Price Level Targeting

Price level targeting is similar to inflation targeting except that growth in
one year over or under the long-term price level target is offset in subsequent
years such that a targeted price-level is reached over time, e.g. five years, giving
more certainty about future price increases to consumers. Uncertainty in price
levels can create uncertainty around price and wage setting activity for firms and
workers, and undermines any information that can be gained from relative prices,
as it is more difficult for firms to determine if a change in the price of a good or
service is because of inflation or other factors, such as an increase in the

pg. 20
efficiency of factors of production, if inflation is high and volatile. An increase in
inflation also leads to a decrease in the demand for money, as it reduces the
incentive to hold money and increases transaction costs and shoe leather costs.

Monetary Aggregates
In the 1980s, several countries used an approach based on a constant
growth in the money supply. This approach was refined to include different
classes of money and credit (M0, M1 etc.). In the USA this approach to monetary
policy was discontinued with the selection of Alan Greenspan as Fed Chairman.
This approach is also sometimes called monetarism.
While most monetary policy focuses on a price signal of one form or
another, this approach is focused on monetary quantities.

Fixed Exchange Rate

This policy is based on maintaining a fixed exchange rate with a foreign
currency. There are varying degrees of fixed exchange rates, which can be ranked
in relation to how rigid the fixed exchange rate is with the anchor nation.
Under a system of fiat fixed rates, the local government or monetary
authority declares a fixed exchange rate but does not actively buy or sell currency
to maintain the rate. Instead, the rate is enforced by non-convertibility measures
(e.g. capital controls, import/export licenses, etc.). In this case there is a black-
market exchange rate where the currency trades at its market/unofficial rate.
Under a system of fixed-convertibility, currency is bought and sold by the
central bank or monetary authority on a daily basis to achieve the target
exchange rate. This target rate may be a fixed level or a fixed band within which
the exchange rate may fluctuate until the monetary authority intervenes to buy
or sell as necessary to maintain the exchange rate within the band. (In this case,
the fixed exchange rate with a fixed level can be seen as a special case of the fixed
exchange rate with bands where the bands are set to zero.)

pg. 21
 These policies often abdicate monetary policy to the foreign monetary
authority or government as monetary policy in the pegging nation must align with
monetary policy in the anchor nation to maintain the exchange rate. The degree
to which local monetary policy becomes dependent on the anchor nation
depends on factors such as capital mobility, openness, credit channels and other
economic factors.

Gold Standard
The gold standard is a system under which the price of the national
currency is measured in units of gold bars and is kept constant by the
government’s promise to buy or sell gold at a fixed price in terms of the base
currency. The gold standard might be regarded as a special case of "fixed
exchange rate" policy, or as a special type of commodity price level targeting.
The minimal gold standard would be a long-term commitment to tighten
monetary policy enough to prevent the price of gold from permanently rising
above parity. A full gold standard would be a commitment to sell unlimited
amounts of gold at parity and maintain a reserve of gold sufficient to redeem the
entire monetary base.
Today this type of monetary policy is no longer used by any country,
although the gold standard was widely used across the world between the mid-
19th century through 1971. Its major advantages were simplicity and
transparency.

KEY RATES OF MONETARY POLICY

CASH RESERVE RATIO (CRR)

It is a percentage of cash every bank has to maintain with RBI. The
percentage is fixed by RBI. It is calculated based on the net demand and time
liabilities of a bank. Demand liability is a type of liability in which the amount must
be paid on demand. For example, Current Account is a demand liability i.e., the
bank must pay the amount (a customer wishes to withdraw) whenever he

pg. 22
demands the amount he has in his Current Account. Time Liability is a type of
liability in which the amount becomes payable only on a certain point of time in
future. For example, Fixed Deposit is a time liability i.e., the bank must pay the
amount (a customer has in his fixed deposit) only on the date it gets matured.

STATUTORY LIQUIDITY RATIO (SLR)

It is a percentage of cash / gold / approved securities that a bank must
maintain with itself before lending to the customers. It is calculated based on the
total demand and time liabilities of a bank. There is a difference between net
demand and time liabilities ‘and ‗total demand time liabilities ‘. The methods of
calculating both are different which are prescribed by RBI.
The difference between CRR and SLR is that in CRR, banks has to maintain
Cash balance with RBI whereas in SLR, banks can maintain themselves the
prescribed percentage (by RBI) of reserve not only in Cash but also in gold or
approved securities. Both CRR and SLR are tools of monetary policy. But the SLR
makes banks to invest some portion of money in Government Securities (‘gilt
edged securities’) which are totally risk free. The purpose of both CRR and are to
curb the lending ability of banks and suck out excess money from the economy.
REPO RATE AND REVERSE REPO RATE
REPO stands for Re-Purchase Option. In our country, both the ‘REPO Rate’
and the ‘Reverse REPO Rate’ are viewed only from the angle of RBI which fixes
both the rates. Hence, when banks give the securities they hold to RBI and borrow
money, the interest rate paid by the banks to RBI is ‘REPO Rate’. When the RBI
gives the securities, it holds to the banks and borrows money, the interest rate
paid by RBI is ‘Reverse REPO Rate’. RBI employs both these rates to suck out
excess money in short-term. Also, for RBI, there is no need to money borrow
money from banks. But it does so to absorb the excess money circulating in the
economy.
When ‘REPO Rate’ is high, banks will not borrow much from RBI and vice-
versa. When ‘Reverse REPO Rate’ is high, banks will find RBI an attractive
destination to place their excess money (as RBI will pay more interest to banks).

pg. 23
 Thus, we can conclude that Repo Rate signifies the rate at which liquidity is
injected in the banking system by RBI, whereas Reverse repo rate signifies the
rate at which the central bank absorbs liquidity from the banks.

PRIME LENDING RATE (PLR)

Prime Lending Rate or Prime Rate is an interest rate banks lend money to
their most favored and credit-worthy customers.

BASE RATE
It is the minimum rate of interest that an individual bank is allowed to
charge from its customers. Unless mandated by the government, RBI rule
stipulates that no bank can offer loans at a rate lower than Base Rate to any of its
customers. Your home loan will always be equal to or more than the Base Rate
but never lower than Base Rate. So, the method of computation of interest rate
for various sectors becomes transparent.

BANK RATE
This is the rate (long term) at which central bank (RBI) lends money to other
banks or financial institutions. If the bank rate goes up, long-term interest rates
also tend to move up, and vice-versa. When bank rate is hiked, banks hike their
own lending rates.

MARGINAL STANDING FACILITY (MSF)

Marginal Standing Facility (MSF) is the rate at which scheduled banks could
borrow funds overnight from the Reserve Bank of India (RBI) against approved
government securities. The basic difference between Repo and MSF scheme is
that in MSF banks can use the securities under SLR to get loans from RBI and
hence MSF rate is1% more than repo rate.

pg. 24
 Chapter 4: Data Analysis
1. How do you think changes in the money supply affect inflation?
Column1
Positively Negatively No Impact

13%

21%

67%

2.Has your bank introduced any new loan products in the last 2 months.

Column1
Yes No

46%
54%

3.Which Financial products do you currently have?

pg. 25
 Column1
Saving accounts Fixed Deposit Mutual Funds
Insurance Credit Card Loan

8.3%

16.7%

66.7%

4.Do you think RBI should focus more on promoting digital payments

Column1
Yes No

20%

80%

5. Which modes of digital payments do you frequently use?

pg. 26
 Chart Title
6

0
Category 1 Category 2 Category 3 Category 4

Series 1 Series 2 Series 3

Sales
9%

10%

23% 59%

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

pg. 27
 Column1
Debit Card Credit Card UPI Mobile wallets Internet Banking

8.3% 37.5%

8.3%
12.5%

33.3%

Conclusion
The monetary policy deals with the functions of money supply in the
market keeping this in mind that it should not cause the situation of inflation and
recession. The Reserve Bank of India is the central authority of the monetary
policy. In India which use different instruments to control the inflow and outflow
of the money in the economy.
Monetary policy is very important for the economic growth of a country, its
instruments plays a very important role to adjust the economic condition
according to the current economic situation.

pg. 28