Now we have a brief
knowledge about Inflation and its effect on the economy, So as customary there
will always be a hero against a villain ,fighting for supremacy and sabotaging
it to ashes.For the purpose we have our own homegrown Mr.007 and the name is Rajan…
Raghuram Rajan, RBI with the help of its periodically revised monetary policy
try to fight against inflation.
MONETARY POLICY-
Monetary policy
consists of two tools-
(i) DIRECT
TOOLS
(ii) INDIRECT
TOOLS
DIRECT TOOLS- these tools are the special powers of RBI through which it can direct and control the amount of flow of money in the market, these consists of SLR (statutory liquidity ratio) and CRR (Cash reserve ratio), lets understand them individually.
CRR- CRR is 4% of NDTL(Net Demand and Time Liability), this the amount of
money banks park with RBI in the form of cash.(must for banks)
SLR- SLR is 22.5% of NDTL, this the amount that the banks has to maintain
in the form of gold or govt. securities before lending to the public.(must for
banks).
NOTE- NDTL is the sum of all the demand (current
account and savings account sum in bank ) and time (fixed deposits or recurring
deposits etc. which are to be paid on maturation), these are assets for us but
a liability(debt) for the banks.
Here is an example to
show the effect of CRR and SLR.
Let say our Lena Bank had 100 Rs as NDTL they can give this much amount of loan to the needy hence 100Rs will flow in the market(can cause inflation), so Rajan(RBI) said keep 4% with us and 22.5% as SLR in the form of govt securities and gold(which can’t be given as loans) so theLena bank is left with only 73.5%(100-22.5-4) of the NDTL resulting in less money to be given as loans and then in market resulting in check on inflation.
INDIRECT
TOOLS/OMO (Open Market Operations)- An open market
operation (also known as OMO) is an activity by a central bank to buy or sell
government bonds on the open market. these tools indirectly help in controlling
inflation. Different methods in OMO’s are-
LAF (Liquidity Adjustment Facility)-
These contains Repo rate and Reverse Repo rate
REPO RATE (Repurchase Agreements)- this is the
rate at which the banks borrow the money from RBI to meet their sudden demands,
these are done with the help of repurchase agreements (these are govt
securities which has a date on it claiming to be re bought at some
certain date).
How RBI controls inflation with this-RBI increase the Repo rate in the conditions of high inflations so that banks are not encouraged to borrow money from RBI and release them in to the market resulting in lesser flow of money and hence inflations decreases. RBI decreases the REPO rate when the inflation is under control .
Current REPO rate stands at 8% of NDTL.
Reverse Repo – This is the opposite of the repo rate
and is the rate at which banks park their excess money with RBI which in turn
gives the govt. securities under repurchase agreement . Banks do this because
their money is in safe hands and they get a healthy rate of interest against
the park amount.
Current Reverse Repo rate is at 7% of NDTL(-1% of REPO rate)
Bank Rate-When banks borrow long term funds from RBI. They’ve to pay this much
interest rate to RBI.
Current Bank Rate is at 9% of NDTL(+1% of Repo rate)
MSF(Marginal Standing Facility)- the difference
between Repo and MSF is that there is a minimum amount of Rs 1 cr to be
borrowed by banks. And this facility is only for Scheduled Commercial Banks
(SCBs).this is done to balance the daily mismatches of banks.
Current MSF is at 9 % of NDTL(+1 % of Repo rate) .
With the help of these, our 007(RBI) try to control inflation.