MONETARY SYSTEM P3

3
2.   Statutory Liquidity Ratio (SLR)
o Percentage of bank deposits which the bank has to keep with itself
o Cash
o Government Securities
o Gold
3.   Bank Rate
o Rate of interest at which RBI provides rediscounting facilities to Banks against their first class security
o Commercial Paper is a First Class Security
4.   Open Market Operations (OMO)




Objectives of SLR

1.   To ensure that bank should maintain sufficient cash with themselves
2.   To Induce Banks to buy
Government Securities

o It is done by buying and selling Government Securities
o This is done by an auction process
o Another component of OMO is Liquidity Adjustment Facility.
o This is used to regulate the money supply in the country
o LAF is done by – Repo and Reverse Repo Rate
 Repo Rate – RBI lends money to Banks by buying government securities
    RBI only fixes Repo rate, Reverse Repo is automatically adjusted to
1% point below the Repo rate.
E.g. – If Repo Rate is changed to 8% Reverse Repo Rate will be automatically adjusted to 7%
 Reverse Repo Rate – At this rate banks buy government securities from RBI

When Repo and reverse Repo increases, Money Supply in the market decreases and when Repo and reverses Repo decreases Money Supply in the market increases.



Per cent v/s Per cent Point

-     1 per cent point = 100 basis point
-     i.e. 10% + 1% point = 10+1 = 11%
-     whereas 10% + 1% = 10+0.1 = 10.1%

CURRENT KEY RATES

CRR                     - 4.25%   REPO RATE         - 8.00% SLR                      - 23.0%   ReREPO Rate     - 7.00% BANK RATE       - 9.00%   MSF RATE           - 9.00%



5.   Marginal Standing Facility (MSF)
o Banks can borrow loan up to 1% on their deposits.
o Interests will be 1% point above Repo Rate and it will be based on day to day basis.
o This facility is created to facilitate borrowing from RBI by banks who do not haven
extra government securities and pledging the existing securities will affect their SLR
requirements of 23%.
o Objective was to overcome liquidity crunch with banks i.e. shortage of funds.

Qualitative Measures


1.   Credit Rationing
o Quota of credit, i.e. priority sector to get 40% of total credit.
o Priority sector includes:-
Agricultural Sector          (18% of total credit)
Weaker Sections
Small Scale Industry
o For Foreign banks priority sector cap is 32% of total credit


M.V  Nair  committee  in
2012 recommended that quota for foreign banks should  be  increased  to
40%




Priority  sector  includes  Exports,  Small  Scale  Industries,  Housing  Sector, Education Loan

2.   Margin Requirements
o Difference  between  the market  value  of  a  collateral  security  and the maximum amount of loan sanctioned against that security by a bank in a particular sector

3.   Differential Rate of Interest
o Different rate of interest for different sectors to increase the flow of credit to those sectors like agriculture sector, small scale industries

4.   Other Measures
o Moral Suasion
o Direct Action like Penalty or Sanctions