Economics Quiz Chapter 8 Reserve Bank of India RBI

Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly. It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure. SLRrefers to a certain percentage of reserves to be maintained in the form of gold and foreign securities. Fourth, there is a need to rationalise the regulatory and supervisory prescriptions with a view to reducing the scope for arbitraging. This also calls for closer coordination of the relevant supervisors/ supervisory arms.

In brief, in India the focus is on regulatory comfort, going beyond regulatory compliance. In a choice between emphasis of regulations on saving capital and protecting depositors’ interests or reinforcing financial system stability, the latter have always prevailed. Sixth, greater transparency is not only necessary to make the markets more efficient and to optimise the allocation of capital, but it is also considered to be the best insurance policy against irrational herd behaviour and unjustified contagion in times of stress.

Types of Qualitative tools

Further, appreciation of the possible permanent and temporary components with regard to oil prices has been articulated in the policies. While undertaking a nuanced approach to managing aggregate demand recognising the elements of shock and consequent impact on inflation expectations, the underlying demand conditions https://1investing.in/ warranted several interest rate and liquidity measures in recent weeks. Moral suasion and public articulation of concerns has helped in achieving a desired re-balancing of suspected excesses in risk-taking among banks. The RBI has issued guidelines on securitisation of standard assets in February 2006.

The recent developments in the global financial markets have been closely followed by many. These include market participants, central bankers, supervisors, multilateral institutions, political leaders, analysts, academicians, and also the layman. With so much attention being focused on the ongoing turbulence, by so many stakeholders, we have a wide menu of solutions and prescriptions.

Regulation of Consumer Credit

“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by the existing statute law. Akshay Palande is a passionate teacher helping hundreds of students in their UPSC preparation. With a degree in Mechanical Engineering and double masters in Public Administration and Economics, he has experience of teaching UPSC aspirants for 5 years. His subject of expertise are Geography, Polity, Economics and Environment and Ecology.

The Qualitative tools don’t increase or decrease the money supply or liquidity in the economy rather channel the available money to needed sectors of the economy. Qualitative Tools of Monetary Policy is a set of instruments used by the Reserve Bank of India which discriminates the use and allocation of credit to different sectors of the economy. The qualitative tools are also known as Selective Tools of Monetary Policy. For instance, the RBI guidelines to incentivize lending to certain sectors like small businesses, the housing sector and the automotive sector is a kind of Qualitative tool.

Under Finance

These are designed to control and adjust the size of a volume of deposits created and the cost of bank credit in general without regard to the particular field of an enterprise or economic activity in which the credit is used. Suppose, RBI feels that more credit supply should be allotted to the agricultural sector, then RBI will reduce the margin, and even 80-90% of the loan can be allotted. Fourth, whether there is, what may be called, financialisation of the political economy? Incidentally, Professor Jagdish Bhagwati’s reference to Wall Street – Washington links is relevant in this context.

• Easy monetary policy in major financial centres, globalisation of liquidity flows, wide-spread use of highly complex structured debt instruments and the inadequacy of banking supervision in coping with financial innovations, contributed to the severity of the crisis.
• For Instance, the banks might be instructed by the RBI not to lend to traders of Onion and Potato in spite of having eligibility and collateral pledging capacity.
• Detailed prudential guidelines on the subject were issued in June 2001, which were reviewed and revised in November 2003.
• 1 Subsequently, on February 12, 2007, CRR was raised by 0.50 percentage point to 6 per cent in two stages following, amongst other things, a sudden jump in inflation rate to 6.73 per cent in week ended February 3, 2007.
• The reverse repo subscriptions were just Rs 49,460 crore as against Rs 2,55,515 crore in December, indicating the pressure on liquidity .
• Further, while rising energy prices may be an exogenous shock for several countries, for the global economy as a whole it is endogenous.

Every bank is required by law to keep a certain percentage of its total deposits in the form of a reserve fund in its vaults and also a certain percentage with the central bank. It is cheap to borrow from the central bank on the part of commercial banks. Investment is encouraged and followed by rising output, employment, income and demand and the downward movement of prices is checked. ARepo rateis a rate at which commercial banks borrow money by selling their securities to the RBI to maintain liquidity.

Credit Rationing

That can be done by increasing the marginal of unnecessary sectors and reducing the marginal of other needy sectors. In this instrument, consumers’ credit supply is regulated through the instalment of sale and hire purchase of consumer goods. Here, features like instalment amount, down payment, loan duration, etc., are all fixed in advance, which helps to check the credit and inflation in the country. The commercial banks have to keep a certain amount of reserve assets in the form of reserve cash.

• In contrast to the above global scenario, India has by-and-large been spared of global financial contagion due to the sub-prime turmoil for a variety of reasons.
• Banks were also advised to put in place a system for ensuring proper checking and documentation of related papers before sanctioning / disbursing of such loans.
• The RBI has simultaneously focussed on financial inclusion and extension of banking services to the unbanked areas of the economy.
• This is to ensure there is no hoarding of essential commodities by using bank loans.
• The scheduled auction of a security with a term of years for a notified amount of Rs 5,000 crore which was to be held during January 5-12 was cancelled.

To maintain liquidity and to control credit in the economy, the RBI also keeps a certain amount of cash reserves. Directives are regarding the purpose for which loans may or may not be given. Thus, the mobilisation what does terminal value represent from the market fell from Rs 9,602 crore in November 2006 to Rs 3,565 crore in December 2006 and further to Rs 2,155 crore, of which a central PSU mobilised Rs 1,250 crore, accounting for about 60 per cent.

Objectives of the Monetary Policy of India

It further raises Investment, output, employment, income and demand in the economy hence the fall in price is checked. For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments. In the Indian Economy, RBI is the sole authority that decides the money supply in the economy. And to control this, RBI implements the monetary policy’s Quantitative and Qualitative instruments to achieve economic goals.

Eighth, there is a new dimension to bank liquidity, with the shifting emphasis to a market based wholesale or purchased liabilities. This makes banks increasingly dependent on the market for raising liquidity, while markets may have a tendency to shy away from providing liquidity when they are most needed. Third, many investors, including institutional ones, with the capacity to undertake their own credit analysis, did not undertake sufficient in-house examination of the risks in the assets underlying structured investments. First, the prolonged benign macroeconomic conditions gave rise to complacency among many market participants and led to an erosion of sound practices, resulting in adoption of poor credit risk appraisal standards. 12.An increase in money supply _______.in a nations Economy will decrease the following. Margin means that proportion of the value of security against which loan is not given.