3 Basic objectives of Monetary Policy :
So, keeping securities and barrowing is repo rate( which is currently 8%), simple barrowing is Bank Rate( Which is currently 9%)
1] Controlling Inflation
2] Encouraging Growth
3] Financial Stability
All of This is so complicated........
Member 1: Why cant we have just Enough Money Around for Everyone and all would be fine.
Money Kumar : So you think if there is enough money around, it would be just fine?
Lets go to the Trip along with ISD....
In The Trip.........
Welcome to the world where there is money everywhere. Take as much as you want dear ISD members please. So tell me how much money you need for this trip...
ummm.. 1000 rupees!...We will buy everything for the whole day,, we guess...
Ok Fine fine.... Done!
In the Market, We saw a Cricket Bat for Rs. 350, it is very affordable.. and every body was interested to buy it....
But slowly slowly every member started to buy it And
And As the demand of Bat rises, the price does too.. now the seller is selling it at 500
But as the demand rises the price does too.....now @700...
Some can still afford it but most cant!!!!!
M1 : WHat is point of having money when we cant do what we want?
M2 : Yes, why cant they have more bats here ...?
M3 : But then we have to cut down more trees, our environment will get effected!!!
inspite of having loads of money, we cannt afford to do what we want? why are there not enough things available??
Money Kumar?? Money Kumar??? MK??? Mk???
Dear ISD members, I am Back....That is What Happen when there is a lot of money but fewer good.
Its Called Inflation!!!
INFLATTION???? WHat is That ????
MK : When too much money Chases too few goods, the price of the goods increase.
That's Inflation. Though it hurts everybody alike, it hurts the poor the most...
M1 : why is that????
MK : Because poor people are not protected. They earn their daily livelihood and cannot save for the rainy day.
M1 : Can you not do anything about it ??? MK??
MK : Of cource, I can! come, I will show you something !!!
Look! we are right now in RBI!!!
M1 : Is this RBI ? wow i am so excited!!!!! what are you pushing that UP?
MK : "Interest Rates"...This is what we at the RBI do!!!
Behind the Scene..
" With the increase in the Interest Interest rate, the secreen shows rupees flow from the banks to the market slowing down as the money is now becoming more expensive and people reduce borrowing from banks"
MK : we have with us Bank Rate, Repo Rate, Rev Repo Rate, SLR and CRR etc.. these are the tools by which we control the money in the market.
When there is excess money in the market and we want to suck it and we simply increase all the above Rates and Inflation gets controlled.
RBI can not stop the price increase completely, But it can ensure that the price do not move up or down rapidly. This way there is enough time for people to adjust and save enough to take care of their future.
Ohhhhhhh!!!!
MK cont... It maintains Price stability by controlling the money available to people. It can control money either providing more money or taking away excess money from the banks....
ISD : Please tell them what is this Bank Rate SLR, CRR, Repo, Rev Repo..
MK : Ok Ok I will tell you.
Bank Rate : It is interest rate at which the Commercial Banks purchase loans form Central Bank(i.e. from RBI)
Repo rate: (Repurchase Rate)
It the interest rate at which the Commercial Banks purchase loans form Central Bank(i.e. from RBI) or we can say it is the rate at which RBI repurchases the government securities from the Commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system.
M1 : But are not the both same as it looks from you above difinition....
MK : yes, but there is a big difference between the two....
Bank Rate signals the RBI's long term outlook on the interest rate while as Repo os a short term.
The Bank Rate is the rate at which commercial baks, which is short of cash temporarly, can barrow from RBI. The Repo rate on the other hand enables banks by selling securities and at the same time agreeing to repurchase them at a later date at a predetermined price.
M1 : ok ok Now I got it..hmmm Money Kumar you are great.... What is Rev Repo ?
MK : Rev. repo = Reverse Repurchase Rate is the rate of interest at which the Central banks (RBI) borrows funds from other banks for a short duration. It is used by the RBI to absorb liquidity from the economy when it feels there is too much money. Currently it is 7%.
CRR: cash reserve ratio: Banks are required to maintain a percentage of their deposit as a cash, means if you deposit Rs 100 in a bank, then bank can not use your entire 100rs for lending or investment purpose. They have to maintain a portion of the deposit as cash and can use only the remaining amount for lending/investment. this minimum percentage which is determined by the RBI is known as CRR. However Banks do not keep this cash with them but they have to deposit it with the central bank (RBI), so that it can help them with cash at the time of need. It was 4.75% but recently it has been changed to 4.5%
SLR: Statutory Liquidity Ratio:
Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of GOLD, cash, government bonds or other securities. This minimum percentage is called SLR. it is 23% curently (w.e.f. 11-08-2012) it has been decreased form 24% which was continuing form 18-12-2010.