Ans:
Interest Rate Structure: Interest
is
a payment for
the services
of capital. It represents a return on capital. In other words, interest is the
price of hiring capita
Term Structure of Interest Rates: The relationship
between interest rates or bond yields and different terms or maturities. The
term structure of interest rates is also known as a yield curve and it plays a
central role in an economy. The term structure reflects expectations of market
participants about future changes in interest rates and their assessment of
monetary policy conditions.
Types
of yield curve/Interest rate structure
There
is no single yield curve describing the cost of money for everybody. The most
important factor in determining a yield curve is the currency in which the
securities are denominated. The economic position of the countries and
companies using each currency is a primary factor in determining the yield
curve. There are following types of yield curves:
1.
Normal
yield Curve
2.
Steep yield
Curve
3.
Flat or
humped yield curve
4.
Inverted
yield curve
Influence of
Interest Rate Structure on Monetary Policy: Interest rates can influence the monetary policy making
process in three distinct ways:
1.
The
role of interest rates is as an instrument variable that the central bank sets
in order to implement its chosen policy.
2.
A
second potential role for interest rates in the monetary policy process is as
an instrument that the central bank varies not for influencing output and
inflation directly but rather for targeting the money stock.
3.
Finally,
most central banks use short-term interest rate as their monetary policy
instrument variable based on long term interest rate movements, which are takes
as more of an information variable about potential future developments.
Monetary Policy: Monetary
policy is the process by which the monetary authority of a country
controls the supply of
money often targeting a rate of interest for the purpose of promoting economic growth and stability. In other words, The actions of a central bank, currency board or other
regulatory committee that determine the size and rate of growth of the money
supply, which in turn affects interest rates. Monetary policy is maintained
through actions such as increasing the interest rate, or changing the amount of
money banks need to keep in the vault (bank reserves).
Objectives of
Monetary Policy:
1.
Price Stability
Price Stability
implies promoting economic development with considerable emphasis on price
stability. The centre of focus is to facilitate the environment which is
favourable to the architecture that enables the developmental projects to run
swiftly while also maintaining reasonable price stability.
2.
Controlled Expansion Of
Bank Credit
One of the
important functions of RBI is the controlled expansion of bank credit and money
supply with special attention to seasonal requirement for credit without
affecting the output.
3.
Promotion of Fixed
Investment
The aim here is
to increase the productivity of investment by restraining non essential fixed
investment.
4.
Restriction of Inventories
Overfilling of
stocks and products becoming outdated due to excess of stock often results is
sickness of the unit. To avoid this problem the central monetary authority
carries out this essential function of restricting the inventories. The main
objective of this policy is to avoid over-stocking and idle money in the
organization
5.
Promotion of Exports and
Food Procurement Operations
Monetary policy
pays special attention in order to boost exports and facilitate the trade. It
is an independent objective of monetary policy.
6.
Desired Distribution of Credit
Monetary
authority has control over the decisions regarding the allocation of credit to
priority sector and small borrowers. This policy decides over the specified
percentage of credit that is to be allocated to priority sector and small
borrowers.
7.
Equitable Distribution of
Credit
The policy of
Reserve Bank aims equitable distribution to all sectors of the economy and all
social and economic class of people
8.
To Promote Efficiency
It is another
essential aspect where the central banks pay a lot of attention. It tries to
increase the efficiency in the financial system and tries to incorporate
structural changes such as deregulating interest rates, ease operational
constraints in the credit delivery system, to introduce new money market
instruments etc.
9.
Reducing the Rigidity
RBI tries to
bring about the flexibilities in the operations which provide a considerable
autonomy. It encourages more competitive environment and diversification. It
maintains its control over financial system whenever and wherever necessary to
maintain the discipline and prudence in operations of the financial system.
Techniques/Tools of Monetary
Policy:
Instruments of Monetary Policy - Quantitative & Qualitative Tools:
(A) Quantitative Instruments or General Tools
1. Bank Rate Policy
(BRP)
2. Open Market
Operation (OMO)
3. Variation in the
Reserve Ratios (VRR)
(B) Qualitative Instruments or Selective
Tools
1. Ceiling on
Credit
2. Margin Requirements
3.
Discriminatory Interest Rate (DIR)
4.
Directives
5.
Direct Action
6.
Moral Suasion
(A) Quantitative Instruments or General Tools:
1. Bank Rate Policy:-
Bank rate is the rate at which the Central bank lends money to the
commercial banks for their liquidity
requirements. Bank rate is also called discount rate. In other words bank rate
is the rate at which the central bank rediscounts eligible papers (like
approved securities, bills of exchange, commercial papers etc) held by
commercial banks. Bank rate is important because it is the pace setter to other
marketrates of interest. Bank rates have
been changed several times by RBI to control inflation and recession.
2. Open market operations:-
It refers to buying and selling of government securities in open
market in order to expand or contract the amount of money in the banking
system. This technique is superior to bank rate policy. Purchases inject money
into the banking system while sale of securities do the opposite. During last
two decades the RBI has been undertaking switch operations. These involve the
purchase of one loan against the sale of another or, vice-versa. This policy
aims at preventing unrestricted increase in liquidity.
3. Variations in the Reserve Ratios (VRR): These cover the following:
(a) Cash Reserve Ratio
(CRR)
The Gash Reserve Ratio (CRR) is an effective instrument of credit
control. Under the RBl Act of, l934 every commercial bank has to keep certain
minimum cash reserves with RBI. The RBI is empowered to vary the CRR between 3%
and 15%. A high CRR reduces the cash for lending and a low CRR increases the
cash for lending. The CRR has been brought down from 15% in 1991 to 7.5% in May
2001. It further reduced to 5.5% in December 2001. It stood at 5% on January
2009. In January 2010, RBI increased the CRR from 5% to 5.75%. It further
increased in April 2010 to 6% as inflationary pressures had started building up
in the economy. As of March 2011, CRR is 6%.
(a) Statutory Liquidity Ratio (SLR)
Under SLR, the government has imposed an obligation on the banks to maintain
a certain ratio to its total deposits with RBI in the form of liquid assets
like cash, gold and other securities. The RBI has power
to fix SLR in the range of 25% and 40% between 1990 and 1992 SLR was
as high as 38.5%. Narasimham Committee did not favour maintenance of high SLR.
The SLR was lowered down to 25% from 10thOctober 1997.It was further
reduced to 24% on November 2008.
(b) Repo And Reverse Repo Rates
In determining interest rate trends, the repo and reverse repo rates are
becoming important. Repo means Sale and Repurchase Agreement. Repo is a
swap deal involving the immediate Sale of Securities and simultaneous purchase
of those securities at a future date, at a predetermined price. Repo rate helps
commercial banks to acquire funds from RBI by selling securities and also
agreeing to repurchase at a later date.
Reverse repo rate is the rate that banks get from RBI for parking their
short term excess funds with RBI. Repo and reverse repo operations
are used by RBI in its Liquidity Adjustment Facility. RBI contracts credit by
increasing the repo and reverse repo rates and by decreasing them it expands
credit. Repo rate was 6.75% in March 2011 and Reverse repo rate was 5.75% for
the same period. On May 2011 RBI announced Monetary Policy for 2011-12. To
reduce inflation it hiked repo rate to7.25% and Reverse repo to 6.25%
(B) Qualitative Instruments or Selective Tools:
Under Selective Credit Control, credit is
provided to selected borrowers for selected purpose, depending upon the
use to which the control tries to regulate the quality of credit - the
direction towards the credit flows. The Selective Controls are:-
1. Ceiling on Credit
The Ceiling on level of credit restricts the
lending capacity of a bank to grant advances against certain controlled
securities.
2. Margin Requirements
A loan is sanctioned
against Collateral Security. Margin means that proportion of the value of
security against which loan is not given. Margin against a particular security
is reduced or increased in order to encourage or to discourage the flow of
credit to a particular sector. It varies from 20% to 80%. For agricultural
commodities it is as high as 75%. Higher the margin lesser will be the loan
sanctioned.
3. Discriminatory
Interest Rate (DIR)
Through DIR, RBI makes
credit flow to certain priority or weaker sectors by charging concessional
rates of interest. RBI issues supplementary instructions regarding granting of
additional credit against sensitive commodities, issue of guarantees, making
advances etc. .
4. Directives
The RBI issues directives
to banks regarding advances. Directives are regarding the purpose for which
loans may or may not be given.
5. Direct
Action
It is too severe and is
therefore rarely followed. It may involve refusal by RBI to rediscount bills or
cancellation of license, if the bank has failed to comply with the directives
of RBI.
6. Moral
Suasion
Under Moral Suasion, RBI issues periodical letters
to bank to exercise control over credit in general or advances against
particular commodities. Periodic discussions are held with authorities of
commercial banks in this respect.
Current Monetary Policy of India (2012-13)
In annual monetary policy 2012-13, RBI surprised markets by easing Repo
rate by 50 bps to 8%. The consensus market expectations were for a cautious 25
bps cut.
1. Policy Rate Changes:
i.
Repo rate lowered by 50 bps to 8%
ii.
Reverse Repo rate and Marginal Standing Facility (MSF) Rate
automatically lowered by 50 bps at 7% and 9% respectively. Further, RBI
increased borrowing under MSF from 1% of NDTL to 2% of NDTL. Banks with excess
SLR can also borrow under MSF.
iii.
CRR remains unchanged at 4.75% of NDTL.
2.
Economic
Projections:
i.
RBI pegged the growth forecast for 2012-13 at 7.3% versus 7.0%
projection for 2011-12.
ii.
Inflation projection lower at 6.5% in March 13 lower than 7% in March
12.
iii.
Money supply growth for 2012-13 pegged at 15% slightly lower than 15.5%
for 2011-12.
iv.
Credit growth increased to 17% for 2012-13 compared to 16% for 2011-12.
3.
Forward
Guidance Statement:
i.
RBI indicates that space is limited for further reduction in policy
rates given growth-inflation dynamics.
ii.
Administered prices of petroleum products should be increased to reflect
their true cost of production.
iii.
Liquidity conditions are expected to be stable and move to RBI’s comfort
zone of 1% of NDTL. The increase in MSF limits will also help banks. In case
the situation changes, appropriate steps will be taken.
No comments:
Post a Comment