***TOOLS OF MONETARY CONTROL USED BY RBI*** TOOLS OF MONETARY CONTROL: RBI uses its monetary policy for controlling inflationary (i.e. rate of growth of prices) or deflationary (rate of fall of prices) situation in the economy by using one or more of the following tools of monetary control. These are discussed below. 1. Cash Reserve Ratio (CRR) ‐ CRR refers to the cash that all banks (scheduled and non‐scheduled) are required to maintain with RBI as a certain percentage of their demand and time liabilities (DTL). As discussed earlier, demand liabilities of a bank represent its deposits which are payable on demand to the depositors (viz. current and savings deposits) and time liabilities refer to its time deposits which are repayable on attainment of specific maturities. In order to meet these liabilities in time (i.e. to keep liquidity), a bank has to keep the regulatory cash reserve with RBI. The CRR can be varied by the RBI from 3% to 15% of banks’ DTL. As of June 2005, it is 5% for scheduled commercial banks and the rate is lower for RRBs, cooperative and non‐scheduled banks. If a bank fails to maintain the prescribed CRR at prescribed intervals, penal interest is levied on the shortfall by adjustment from the interest receivable on balances with the RBI. A cut in the CRR enhances loanable funds with banks and reduces their dependence on the call (i.e. overnight market) and term (i.e. long‐ term) money market, which helps to bring down the Call rates. An increase in CRR squeezes the liquidity in the banking system, reduces their lending operations and tends to increase call rates. 2. Statutory Liquidity Ratio (SLR) ‐ It refers to the liquid reserve require‐ ment of banks, in addition to CRR. SLR is maintained by all banks (scheduled and non‐scheduled) in the form of cash in hand (exclusive of the minimum CRR), current account balances with SBI and other public sector commercial banks, unencumbered approved securities and gold. RBI can prescribe SLR from 25% to 40 % of bank’s DTL (as of June 2005 SLR is 25%). SLR has three objectives: ? to restrict expansion of banks credit, ? to increase banks’ investment in approved securities, and ? To ensure solvency of banks. Increase in SLR results in the reduction of the lending capacity of banks by preempting certain portion of their DTL for Government or other approved securities. This has a deflationary impact on the economy, not only by reducing the supply of loanable funds of banks, but also by increasing the lending rates in the face of an increasing demand for bank credit. The reverse phenomenon happens in case of a slash in SLR. 3. Bank Rate ‐ Bank Rate is the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other eligible commercial papers from banks. It is the basic cost of rediscounting and refinance facilities provided by the RBI. Bank Rate is used by RBI to vary the cost and the availability of refinance and to change the loanable resources of banks/other financial institutions. Change in Bank Rate affects the interest rates on loans and deposits in the banking system across the board in the same direction, if not to the same extent. Post‐deregulation and induction of banking reforms in 1991, the RBI has gradually loosened its direct regulation of deposit and lending rates and these are left to banks to decide through their Boards, with only few exceptions. However, the RBI can still affect interest rates, via changes in its Bank Rate, whenever the situation of the economy warrants it. 4. Open Market Operations (OMO) ‐ This refers to the sale or the purchase of Government securities (of Central or State Governments or both) by the RBI in the open market with a view to increase or decrease the liquidity in the banking system and thereby affect the loanable funds with banks. RBI can also alter the interest rate structure through its pricing policy for open market sale/ purchase. 5. Selective Credit Control (SCC) ‐ RBI issues directives, under sections 21 and 35A of Banking Regulation Act, stipulating certain restrictions on bank advances against specified sensitive commodities as follows: Pulses, other food grains (viz. coarse grains), oilseeds, oils including Vanaspati, all imported oil seeds and oils, sugar including imported sugar (excepting buffer stocks and unreleased stock of sugar with sugar mills), gur, khandsari, cotton/ kapas, paddy/rice, wheat. RBI issues Selective Credit Control (SCC) directives with an objective to prevent speculative holding of essential commodities which results in a rise in their prices. The RBI’s general guidelines on SCC are: (i) Banks should not grant the customers dealing in SCC commodities, any credit facilities (including those against book debts/receivables or even collateral securities like insurance policies, shares, stocks and real estate) that would directly or indirectly defeat the purpose of the SCC directives. (ii) Credit limits against each commodity covered by SCC directives should be segregated and the SCC restrictions be applied to each of such segregated limits. Presently only buffer stocks of sugar, unreleased stocks of sugar with sugar mills representing free sale sugar and Levy sugar are covered by the SCC directives. 6. Other tools ‐ The RBI did use other tools of regulation in the past but after the liberalization policy of 1991, usage of most of these tools has been discontinued by the RBI. These tools are: ? Credit Rationing/allocation, ? Credit Authorization Scheme ? Credit Planning. ? Inventory and Credit Norms.
Posted on: Fri, 23 May 2014 10:09:48 +0000
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