since March 2010. The interest rate on MSF will be 100 basic points above the Repo Rate and 200 basic pints above the Reverse Repo Rate. Repo rate was raised to 7.75% on October 20, 2013 and further to 8.00% on October January 28, 2014. Agricultural Refinance and Development Corporation (ARDC) and National Bank for Agriculture and Rural Development (NABARD). It was reduced to 13% in April 1996. This department is concerned with the activities related to the issuing of money. Written by George Mathew , Edited by Explained Desk | Mumbai | Updated: December 10, 2020 12:10:58 pm. Selective credit controls are qualitative credit control measures undertaken by the central bank to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities. This requires a restrictive credit policy. 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. Under the original Banking Regulation Act 1949, banks were required to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposits liabilities. Looks like you’ve clipped this slide to already. 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. 85 crore can be waived during extreme contingency. By varying this ratio the credit can be controlled. Consequently, the RBI hiked short-term interest rates in July 2013 and compressed the domestic money market liquidity in order to restore stability to the foreign exchange market. MSF rates were reduced to 9.50% (with repo rate rising to 7.50%) on September 20, 2013 and further to 9.00% (with repo rate remaining unchanged) on October 7, 2013. The present CRR ratio is 11% w.e.f. • STRUCTURE Refinance and Rediscounting Facilities: In recent years, the Reserve Bank has been following a policy of providing selective refinance and rediscounting facilities. (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. According to this system, a commercial bank can borrow from the Reserve Bank at the bank rate only if it maintains a minimum net liquidity ratio to its total demand and time liabilities, and it will have to pay a penal rate of interest to the Reserve Bank, if the net liquidity ratio falls below the minimum ratio fixed by the Reserve Bank. Both private and public enterprises should be encouraged to seek much larger financial support from capital market. RBI has advised all banks, large non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy, and work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. In order to check excessive borrowings from the Reserve Bank by the commercial banks, the Reserve Bank introduced the system of net liquidity ratio in September 1964. It aims at adequately financing of economic growth and, at the same time, ensuring reasonable price stability in the country. Potential Linked Credit Plans (PLPs) 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. Generally the Reserve Bank’s annual sales of securities have exceeded the annual purchases because of the reason that the financial institutions are required to invest some portion of their funds in government and approved securities. • HISTORY B. 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. See our Privacy Policy and User Agreement for details. • CREDIT CONTROL Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of India in November 1965. As a first step in the pursuit of this objective, CRR was reduced in two phases from 15% to 14.5% in April 1993 and further to 14% in May 1993. 1, 1935, under the Reserve Bank of India Act. Its general and selective controls are effective only to the extend to which inflationary pressures are the result of bank finance. The situation, however, has changed since the introduction of economic reforms in early 1990s. This leads to moderate inflation around 6.50 % to 7.00 % by March 2012. Monetary and fiscal policies are closely interrelated and therefore should be pursued in coordination with each other. Accordingly, the liquidity ratio was raised from 25% to 30% in November 1972, to 32% in 1973, to 35% in October 1981, to 36% in September 1984, to 38% to in January 1988, and to 38.5% effective from September 1990. ADVERTISEMENTS: Money Controlling Measures Adopted by the RBI! NEED FOR CREDIT CONTROL Controlling credit in the economy is amongst the most important functions of the Reserve Bank of India. The monetary control measures have no influence on the circulation of black money because the borrowers and lenders of this money keep their transactions secret and outside the orbit of monetary policy. In spite of the fact that some progress has been made in providing credit to these priority sectors by the commercial banks, particularly after the nationalisation of big banks, the efforts in this direction are still insufficient and these sectors continue to remain dependent mainly upon private sources for their credit needs. The post was created through the Reserve Bank of India Act, 1934, and has the responsibility to … The repo rate was cut on January 15, 2015, March 4, 2015 and June 2, 2015. (b) The Reserve Bank has fixed minimum margins to be maintained by the banks regarding their advances against the commodities subject to selective controls. 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. However, due to underdeveloped security market, the open market operations of the Reserve Bank are restricted to government securities. The Reverse Repo Rate (short term borrowing rate) was also raised by 50 basis Points from 5.75% to 6.25%. IV.17 Under the LBS, one bank in each district is assigned the leadership role and acts as a consortium leader to co-ordinate the efforts of the banks in that district, particularly in matters such as branch expansion and credit planning to meet the credit needs of the district. 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. For instance, in October 1962, the banks were allowed to borrow additional funds from the Reserve Bank in order to provide finance to small scale industries and cooperatives. 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. The main purpose of this scheme is to keep a close watch on the flow of credit to the borrowers. The monetary policy in the country is, thus, prominently featured as anti-inflationary. Through the technique of open market operations, the central bank seeks to influence the excess reserves position of the banks by purchasing and selling of government securities, commercial papers, etc. However, on the third time the RBI took a cautious stand on economic recovery, while forecasting a week monsoon, rising oil prices and rupee depreciation due to rising US interest rates. The RBI raised the Repo Rate (short term lending rate) by 50 basic points from 6.75% to 7.25%. Therefore, tight monetary policy stance was maintained during 2013-14 and 2014-15. There is an inverse relationship between inflation rate and unemployment rate. But, no serious efforts were made to bring about the necessary integration of monetary and fiscal policies to meet the genuine needs of the investment and growth requirements of price stability. 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