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importanttips
1.WhatisaRepoRate?
A:ReporateistherateatwhichourbanksborrowrupeesfromRBI.Whenever
thebankshaveanyshortageoffundstheycanborrowitfromRBI.Areduction
inthereporatewillhelpbankstogetmoneyatacheaperrate.Whentherepo
rateincreases,borrowingfromRBIbecomesmoreexpensive.
2.WhatisReverseRepoRate?
A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which
Reserve Bank of India (RBI) borrows money from banks. RBI uses this tool
whenitfeelsthereistoomuchmoneyfloatinginthebankingsystem.Banksare
always happy to lend money to RBI since their money is in safe hands with a
goodinterest.AnincreaseinReversereporatecancausethebankstotransfer
morefundstoRBIduetothisattractiveinterestrates.
3.WhatisCRR?
A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to
keep in Current Account with RBI. If RBI decides to increase the percent of
this,theavailableamountwiththebankscomesdown.RBIisusingthismethod
(increase of CRR rate), to drain out the excessive money from the banks.
PresentCRRis6%
(CRRforScheduledBanksisAspersection42ofRBIAct)
4.WhatisSLRRate?
A: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to
maintainintheformofcash,orgoldorgovt.approvedsecurities(Bonds)before
providingcredittoitscustomers.
SLR rate is determined and maintained by the RBI (Reserve Bank of India) in
order to control the expansion of bank credit. SLR is determined as the
percentage of total demand and percentage of time liabilities. Time Liabilities
are the liabilities a commercial bank liable to pay to the customers on their
anytime demand. SLR is used to control inflation and propel growth. Through
SLR rate tuning the money supply in the system can be controlled efficiently.
Present SLR is 24% for Scheduled Commercial Banks. For Scheduled Co
OperativeBanksSLRis25%
(SLRforScheduledBanksandalsoNonScheduledBanksisasperSection24
ofBankingRegulationAct)
5.WhatisBankRate?
A:Bankrate,alsoreferredtoasthediscountrate,istherateofinterestwhicha
central bank charges on the loans and advances that it extends to commercial
banks and other financial intermediaries. Changes in the bank rate are often
usedbycentralbankstocontrolthemoneysupply..PresentBankrateis6%
FunctionsofRBI?
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TheReserveBankofIndiaisthecentralbankofIndia,wasestablishedonApril
1, 1935 in accordance with the provisions of the Reserve Bank of India Act,
1934. The Reserve Bank of India was set up on the recommendations of the
Hilton Young Commission. The commission submitted its report in the year
1926, though the bank was not set up for nine years. To regulate the issue of
BankNotesandkeepingofreserveswithaviewtosecuringmonetarystabilityin
Indiaandgenerallytooperatethecurrencyandcreditsystemofthecountryto
itsadvantage.BankertotheGovernment:performsmerchantbankingfunction
for the central and the state governments also acts as their banker. Banker to
banks: maintains banking accounts of all scheduled banks. Supervises and
controls Banks and Financial Institution. Regulates transactions in Foreign
Exchange.
RBIBankertoGovernment.
As per Sec 20 and 21 of the RBI Act Reserve Bank of India is obliged to
transact Banking business and manage the public debts of the Central
Government. As per Sec 21A RBI can perform similar functions for State
Government.
AspertheprovisionofthePublicDebtAct1944andalsoReserveBankofIndia
Act , RBI manages the public Debt of Central and State Government. Public
DebtscanbebywayoflongtermbondsorbywayofshorttermTreasurybills.
TreasuryBills.
TreasurybillsrepresentshorttermborrowingsofCentralGovernment.Theyare
issuedasPromissoryNoteswithdifferentmaturitiessay91days182daysand
364 days. Treasury bills are issued by RBI by way of Auction basis. Treasury
billsareNegotiableinstrument.
Whatismonetarypolicy?
A Monetary policy is the process by which the government, central bank, of a
countrycontrols(i)thesupplyofmoney,(ii)availabilityofmoney,and(iii)costof
moneyorrateofinterest,inordertoattainasetofobjectivesorientedtowards
the growth and stability of the economy. This has two objectives, To ensure
pricestabilityandtomakeavailableadequatecredittotheproductivesectorsof
theeconomy.Thisisachievedbyregulatingmoneysupplyinthemarket.
MoneySupply.
Money supply in the economy is represented by four types of monetary
aggregatesvizM0,M1,M2andM3.andthreetypesofliquidityaggregatesviz
L1 L2 and L3 These 7 types of aggregates are computed by RBI as per the
recommendationsofDrYVReddyCommittee.
The monetary aggregate capture the data only with respect to Banking
system.TheLiquidityaggregatetakingintoconsiderationthemoneysupplydue
toPostOfficedepositsofFinancialInstitutionsandalsoNonBankingFinancial
Institution.
Monetaryaggregate
Nature Components
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M0 Monetary base. This is computed by RBI once in a
week.
M0 = Currency in circulation + Bankers deposits with
RBI+otherdepositswithRBI.
M1 NarrowMoney.
M1 = Currency with Public + Demand Deposits with
Banks+otherdepositswithRBI.Demanddepositswith
Banking system includes Current Deposits and only
demandliabilityportionofSavingsBank,.
M2 Itcanbecomputedinthefollowingtwoways
M2= M1 + Certificate of Deposits issued by Banks +
Term Deposits (Excluding FCNR (B) with the
contractual maturity up to 1 year with the Banking
systems.)
Or M2 = Currency with Public+ current Deposit with
Bankingsystem.+SBwithBankingsystem.+Certificate
depositsissuedbyBanks+TermDepositswithmaturity
upto1year.(FCNR(B)excluded).
M3 BroadMoney.
M3 = M2 + Term Deposit (Excluding FCNR (B)
deposits)morethan1year+callborrowingbyBanking
systemfromnondepositoryfinancialcorporation.
Liquidity
Aggregates.
L1 L1 = M3 + All deposits (Excepting NSCs), with post
officeSavingsBank.
L2 L 1 + Term Deposit /Term Borrowings /Certificate of
deposit issued by Term lending institution/Refinancing
institution.
L3 L2+PublicdepositofNBFCs
L1,L2andL3arecompiledbyRBIonceinaquarter.

WhatisFiscalPolicy?
Fiscal policy is the use of government spending and revenue collection to
influence the economy. These policies affect tax rates, interest rates and
government spending, in an effort to control the economy. Fiscal policy is an
additionalmethodtodeterminepublicrevenueandpublicexpenditure.
CreditPolicyandCreditcontrol.
GeneralCreditControl.
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General or quantitative Credit control is exercised by changing 1) Bank rate 2)
Reserve Requirements 3) Open Market operations 4) Interest rate Policy. By
regulating these RBI influences the quantum of lendable resources of the
commercialBanksandtherebythetotalvolumeofcreditwhichisanimportant
sourceofmoneysupply.Thisinturnhelpscontrolinflation.
Bankrate.
This is the rate at which the Central Bank of the country makes advances
againstapprovedsecurities.PurchasesorrediscountseligibleBillsofExchange
and other commercial paper to provide financial accommodation to Banks or
otherspecifiedgroupofInstitutions.Sec49ofRBIactdefinesBankrateasthe
standardrateatwhichitispreparedtobuyordiscountbillsofexchangeorother
commercialpapereligibleforpurchaseunderthisact.Bankrateaffectbothcost
and the availability of credit. The effectiveness of Bank rate as a credit control
measure is very limited in India, as Banks are now allowed to a great extent.
Freedomtochangerateofinterestaspertheirdiscretion.
OpenMarketoperation.
ThebuyingandsellingofsecuritiesorotherassetslikeForeignExchange,gold
byCentralBankwithanobjective
SelectiveCreditcontrol.
While general Credit control is used to regulate the cost and total volume
ofCredit,theselectiveCreditcontrolalsoknownasquantitativecontrolisused
toregulatecostandquantumofcreditinselectivesectors.RBIisempoweredto
exercise selective Credit control by virtue of section 21 and 35A of Banking
Regulation Act. Selective Credit control is exercised by stipulating 1) Minimum
margin, for lending against selected commodities. 2) Ceiling on the level of
credit 3) Minimum interest to be charged on advances against particular
commodities.
WhatisNABARD?
NABARDwasestablishedbyanactofParliamenton12July1982toimplement
the National Bank for Agriculture and Rural Development Act 1981. It replaced
the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell
(RPCC)ofReserveBankofIndia,andAgriculturalRefinanceandDevelopment
Corporation (ARDC). It is one of the premiere agency to provide credit in rural
areas. NABARD is set up as an apex Development Bank with a mandate for
facilitatingcreditflowforpromotionanddevelopmentofagriculture,smallscale
industries,cottageandvillageindustries,handicraftsandotherruralcrafts.
Whatarenonperformingassets?
Nonperformingassets,alsocallednonperformingloans,areloans,madebya
bank or finance company, on which repayments or interest payments are not
being made on time. A debt obligation where the borrower has not paid any
previously agreed upon interest and principal repayments to the designated
lenderforanextendedperiodoftime.Thenonperformingassetisthereforenot
yieldinganyincometothelenderintheformofprincipalandinterestpayments.
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LatestCRR,SLRetcasperRBIlatestPolicyannouncement.
RBI Credit Policy Hikes Repo Rate Jan 2011, RBI Policy January 2011, Repo
Rate Reverse Repo Rate, RBI Hikes Repo Rate, Reserve Bank Credit Policy
2011:
RBIreleasedthecreditpolicyonJanuary252011(Tuesday)
Reporateincreasedby0.25%(0.25percent)to6.5%
Reversereporateincreasedby0.25%to5.5%
FY11Growthtargetat8.5%withupwardbias
FY11creditgrowthtarget20%
Cashreserveratio(CRR)unchangedat6%
Statutoryliquidityratio(SLR)unchanged.At24%
MarchInflationforecastat7%fromthecurrent5.5%.
Fiscaldeficitposesachallenge,foodinflationwidespreadacrossmanyitems,
bankcashshortageoutsidecomfortzone
RateofInterestonSavingsBankdeposit3.5%
InterestrateforbalanceinCurrentdepositNil.