Monetary Policy of the Reserve Bank of India!
1. Bank Rate Policy: The bank rate or the discount rate has been used by the R.B.I, when banks turned to it as lender of last resort. From its very inception until November 1951, the bank rate was kept unchanged at 3%.
However, since then, it has been raised from time to time. It was raised to 11% on July 3, 1991 and to 12% in October 1991, for cubing imports and reducing aggregate dexadmand.
It was gradually reduced 6.5% in October 2001, the lowest rate since May 1973. However, the bank rate has not proved to be very effective as an instrument for controlling the amount of bank borrowing. The reason is that, just by varying the bank rate, the R.B.I, cannot alter the interest rate differential between the lending rates of banks and the cost of borrowed reserves—the factor which determines the profitability to banks from borrowxading.
2. Open Market Operations: The R.B.I. Act has empowered the Bank to buy and sell short- term commercial bills. But this provision has served very little purpose, largely due to the absence of organised bill market in the country. Moreover, the bulk of government securities in India are held by institutional investors, notably commercial banks and insurance companies. Consequently, dealings of the R.B.I, in regard to open market operations are largely confined to them.
The R.B.I, over the years has tried to raise resource for both developmental and defence purxadposes by selling government securities. Consexadquently, a fiscal bias has emerged in open market operations. In other words, the monetary aspect of O.M.Os has receded to the background. This bexadcomes clear from the fact that over the last two decades O.M.Os. have been doing well to prevent unchecked expansion of liquidity through govxadernment borrowing. The growing volume of pubxadlic debt reduced cash in the hands of the public.
3. Cash Reserve Ratio: This method, i.e., changing cash reserve ratio (CRR) which refers to the ratio of cash holding to total liabilities of a bank has been used by the R.B.I, for the first time in 1960 when there sharp increase in commodity prices. But this instrument was used for a short **.
In 1962 the R.B.I, fixed reserve requirements at 3% for both demand and time liabilities (deposxadits). This technique of credit control has been very frequently used in recent years with a view to staxadbilising prices. It was raised to 5% in June 1970. Since this measure had ** to yield necessary results, the cash reserve ratio was raised again to 7% in September 1973. Due to huge growth of liquidity in the economy over time, the ratio was raised to 15% in July 1989. However, the Governxadment to reduced the CRR to 5.5% in October 2001. This was supposed to increase the flow of bank credit by Rs. 8,000 crores.
4. Statutory Liquidity Ratio: In 1960, the Reserve Bank attempted to control credit expanxadsion by fixing up additional cash reserve requirexadments. But this measure was not truly effective. The main reason for this was that the commercial banks satisfied the reserve requirements by makxading necessary portfolio adjustments without alterxading their liquidity position. The banks sold the government securities to raise their cash reserve ratio and thus their capacity to create credit rexadmained unchanged.
The policy of the commercial banks clearly revealed the limitation of the techxadnique of variable cash reserve ratio. In 1962 the Government, therefore, made necessary amendxadments to the Banking Regulation Act, 1949. Origixadnally, the commercial banks were under the legal obligation to maintain a liquidity ratio of 20% against their demand and time liabilities. It was raised to 38.5% in April 1990.
