Effect on Economy Due to Change in Rbi Policy

Topics: Inflation, Monetary policy, Central bank Pages: 9 (2700 words) Published: November 22, 2012
Shivans gupta
nifm- Faridabad
Shivans gupta
nifm- Faridabad
Effect of Monetary Policy of RBI on Economy
Effect of Monetary Policy of RBI on Economy

Effect of Change in monetary policy of RBI on Economy

An economy consists of the economic systems of a country or other area; the labour, capital, and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area. A given economy is the result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.

Repo rate
Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation.

Reverse Repo rate 
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.

Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa. RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of October 2012, the CRR is 4.5 percent.

Statutory Liquidity Ratio
Every financial institute have to maintain a certain amount of liquid assets from their time and demand liabilities with the RBI. These liquid assets can be cash, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as Statutory Liquidity Ratio. There was a reduction from 38.5% to 25% because of the suggestion by Narshimam Committee. The current SLR is 23%.

Bank rate
Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances to a commercial bank. Whenever the banks have any shortage of funds they can borrow it from the central bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Gross domestic product (GDP)
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living; GDP per capita is not a measure of personal income (See Standard of living and GDP). Under economic theory, GDP per capita exactly...

Bibliography: * www.rbi.org.in
* www.indiabudget.nic.in
* www.wikipedia.org
* www.simpletaxindia.net
* www.karvy.com
* www.tradingeconomics.com
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