… Privacy Policy3. Unsatisfactory performance of the monetary policy is also due to the imbalance in credit allocation. B. The Reserve Bank has adopted a number of credit control measures to check the inflationary tendencies in the country: The bank rate is the rate at which the Reserve Bank advances to the member banks against approved securities or rediscounts the eligible bills of exchange and other papers. There is an inverse relationship between inflation rate and unemployment rate. In the seventh plan, the amount of deficit financing (i.e., net Reserve Bank Credit to the government) has been fixed at a level considered just sufficient to generate the additional money supply needed to meet expected increase in the demand for money, such an anti-inflationary fiscal policy will liberate the Reserve Bank for its anti-inflationary responsibilities and will enable it to extend sufficient credit facilities for the development of industry and trade. Mumbai: On 2 December, the Reserve Bank of India (RBI) asked HDFC Bank, the largest private sector lender in the country, to halt all launches of its digital business generating activities under its programme Digital 2.0 and also asked the bank to stop issuing credit cards to new customers. 1 The Reserve Bank: Tradition and Change The origin of the Reserve Bank can be traced to 1926, when the Royal Commission on Indian Currency and Finance—also known as the Hilton-Young Commission— recommended the creation of a central bank to separate the control of currency and credit from the government and to augment banking facilities throughout the country. HDFC Bank submits plan to stop repeated glitches after RBI action Plan submitted to RBI includes both short and long-term solutions, which may take up to three months … • NEED This means that the distribution of credit in the capital market has not been based on the efficiency and profitability of the enterprises demanding funds. List of Returns / Statements to be submitted by scheduled commercial banks to Rural Planning and Credit Department Software for Download Appointment of Statutory Auditors v. Credit Facilities through Financial Institutions: The Reserve Bank has also been instrumental in the establishment of various financial institutions like Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial Reconstruction Corporation of India (IRCI), Industrial Credit and Investment Corporation of India (ICICI), State Finance Corporations (SFCs). The post was created through the Reserve Bank of India Act, 1934, and has the responsibility to … The bank rate was again raised to 11% in July 1991. Again in line with the monetary policy aimed at facilitating adequate availability of credit to support industrial recovery, the CRR was further reduced to 8% in April 2000, to 7.5% in May 2001, to 5.5% in October 2001, to 4.75% in November 2002, to 4.50% in June 2003. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. The amendment of the Act in 1956 empowered the Reserve Banks to use the cash reserve ratio as an instrument of credit control by varying them between 2 and 20% on the demand liabilities and between 2 and 8% on the time liabilities- Further, amendment of the Act in 1962 removes the distinction between demand and time deposits and authorises the Reserve Bank to change cash-reserve ratio between 3 and 15%. Sections (178) and 17(2)(a) of Reserve Bank of India Act authorise the Reserve Bank to purchase and sell the government securities, treasury bills and other approved securities. The increases in the bank rate were adopted to reduce bank credit and control inflationary pressures. Various failures and limitations of the Reserve Bank’s monetary policy are discussed below: The monetary policy in India has not been given an active and crucial role in the expansion and development of the economy. So far the public financial institutions have been required to raise resources at lower than the market rate in order to finance investments in the private industries. Bank rate now serves as a reference rate for other rates in the financial markets. 1 crore or more to any single party. The representatives of Panchayat Samitis are also invited to attend the meetings at half yearly intervals so as to share their knowledge and experience on rural development in the credit planning exercise. Looking ahead, efforts are now called for in getting back to low inflation /sustained high growth path in India by renewed focus on supply-side measures and improved fiscal consolidation. The RBI announced a comprehensive annual monetary policy (2011-12) on May 8, 2011. Written by George Mathew , Edited by Explained Desk | Mumbai | Updated: December 10, 2020 12:10:58 pm. The Repo Rate will be in the middle; the Reverse Repo Rate will be 100 basic Points below it and the MSF rate will be 100 basic points above it. This minimum statutory liquidity ratio is in addition to the statutory cash-reserve ratio. Progress is being made on the plan of action provided to the RBI and the bank has taken this positively as it will raise the standard, according to a senior official of HDFC Bank. This will benefit crores of saving bank account holders. A rise in the bank rate leads to a rise in the other market interest rates, which implies a dear money policy increasing the cost of borrowing. The monetary policy in India during the planning period has been directed to meet the twin objectives of- (a) expansion of the economy and (b) control of inflationary pressures. The interest rate regime is now tilting in favour of savers. A. In view of the Narsimham Committee report, the government decided to reduce SLR in stages from 38.5% to 25%. 115 crore with the provision that the minimum requirement of keeping foreign securities of the value of Rs. The Reverse Repo Rate will be operative but it will be pegged at a level 100 basic points below the Repo Rate. (b) The CRR was cut by 50 basic points to 6.50% from 6.00% where it had stood since April 2010, in a move to ease liquidity in the banking system. The RBI played a critical role in the reconstruction scheme of Yes Bank in March 2020 by putting together a bailout plan headed by State Bank of India. • CONCLUSION The Reserve Bank of India (RBI) embarked on an extraordinary expansionary policy to manage the financial pressures unleashed by COVID-19. It aims at adequately financing of economic growth and, at the same time, ensuring reasonable price stability in the country. Wholesale Price Index (WPI) inflation after remaining at a higher level of over 9.00 % throughout the year has been falling since December 2011 as a result of nearly two years of tight monetary policy with adjustments of key policy rates (such as Repo Rate, Reverse Repo Rate, etc.) The RBI has opened a new borrowing facility under the Marginal Standing Facility (MSF), effective from May 7, 2011 to contain volatility in the overnight inter-bank rates. • INTRODUCTION Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of India in November 1965. An increase in the cash- reserve ratio reduces the excess reserve of the bank and a decrease in the cash-reserve ratio increases their excess reserves. Excessive increase in bank credit to the private commercial sector is another cause of large expansion of money supply leading to the failure of monetary policy. 1, 1935, under the Reserve Bank of India Act. • STRUCTURE The situation, however, has changed since the introduction of economic reforms in early 1990s. During the planning era, in its attempt to check inflation, the Government of India and the Reserve Bank have accorded a high priority to monetary control. MORAL SUASION:-This is a tactful technique followed by RBI. Cheaper loans will encourage demand for houses, automobiles and consumer durables. At 14.97 million, HDFC Bank is the market leader in terms of number of credit cards issued. It depicts short- run and long-run Phillips Curves (SRPCs and LRPC) which highlight the trade-off involved in managing inflation. Further, in case of accounts with an aggregate exposure of INR 15 billion or more, the resolution plans would require vetting by the restructuring committee constituted by the RBI. The effective SLR on total outstanding net demand and time liabilities of the scheduled commercial banks come down to 27% by the end of December 1996. By varying this ratio the credit can be controlled. Later on other commodities of common use were also included. The main reason for undertaking large-scale deficit financing has been the desire to maintain high levels of planned outlays and to promote investment in the economy. • LIMITATIONS 1. • CURRENT RATES In a developing economy like India, appropriate monetary policy can play a positive role in creating conditions necessary full rapid economic growth. The basic and important needs of credit control in the economy are- • To encourage the overall growth of the "priority sector" those sectors of the economy which is recognized by the government as "prioritized" depending upon their economic condition or … Indeed it has been the major function of the […] (d) To sum up, the growth -inflation balance of monetary policy stance has shifted to growth, while at the same time ensuring that inflationary pressures remain under control. VIII. The central theme of the Reserve Bank’s monetary policy has been ‘controlled monetary expansion’. If you continue browsing the site, you agree to the use of cookies on this website. Existence of large quantity of money in the black market also poses a serious limitation to the monetary policy of the Reserve Bank. Through these institutions, the Reserve Bank provides medium-term and long-term credit facilities for development. The Reserve Bank of India has undertaken the following selective credit controls to check speculative activities and inflationary pressures and extend credit in developmental lines: Since 1956, the Reserve Bank has been making extensive use of the selective controls and has issued many directives to the banks: (a) The first directive was issued on May 17, 1956 to restrict advances against paddy and rice. (b) It makes larger resources available to the government. The Narsimham Committee in its report submitted in November 1991, was of the view that a high Cash Reserve Ratio (CRR) adversely affects the bank profitability and thus puts pressure on banks to charge high interest rates on their commercial sector advances. Continuous increase in money supply in the country has been caused by adopting the method of deficit financing to finance the budgetary deficit of the government. The RBI raised the Repo Rate (short term lending rate) by 50 basic points from 6.75% to 7.25%. But the anti-inflation monetary management has an adverse impact on economic growth. The main features of the policy are given below: In this policy, controlling inflation takes precedence over growth which has been pegged at a lower level of 8% for 2011-12 against the government projection of 9%. Apart from meeting developmental and expansionary requirements of the economy, the Reserve Bank has also been assigned the task of controlling the inflationary pressures in the economy. The banking regulator has asked the bank to stop all new digital business generating activities under its Digital 2.0 plan and issuance of new credit cards. The bank rate was raised from 3% to 3.5% in November 1951 and was further raised to 4% in January 1963, to 5% in September 1964, to 6% in February 1965. Moderate inflation around 6.50 % to 7.00 % discontinued between 1964 and 1969 with purpose. 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