Economics for everyone – Easy Economics credit policy - interest rates in interest of nation

India Infoline News Service | Mumbai |

It also increased its benchmark prime lending rate by one per cent to 14 per cent with immediate effect. The hike will make the BPLR-related loans of the bank dearer to its customers. With this, vehicle loans having a three-year tenor will now carry an interest rate of 12 per cent as against 10.5 per cent earlier, the bank`s website said

The issue:

Interest rate in the interest of the nation that’s the message that Reserve Bank of India (RBI) governor, Y.V. Reddy, sent out in his last quarterly policy review on Tuesday 29 July 2008. The message came in the form of a steep 50 basis points (bps) hike in the repo rate, and a 25 bps one in the cash reserve ratio (CRR) — both now stand at 9% respectively to check inflation, now at 12.01%.

It also increased its benchmark prime lending rate by one per cent to 14% with immediate effect. The hike will make the BPLR-related loans of the bank dearer to its customers. With this, vehicle loans having a three-year tenor will now carry an interest rate of 12% as against 10.5% earlier, the bank's website said.


Key Policy highlights
 

The repo rate has been hiked by 50 basis points to 9% from 8.5% earlier. The CRR, the ratio of cash balances to be maintained by banks with the central bank, has been increased by 25 basis points to 9% (effective from August 30, 2008). The bank rate (the rate at which the RBI lends to commercial banks) and the reverse repo rate under the liquidity adjustment facility have been kept unchanged. The gross domestic product (GDP) growth forecast for FY2009 has been revised downwards from 8-8.5% to around 8.0%, barring domestic or global shocks. Inflation to be contained around 7% by March 2009, with a medium-term objective of a 3% inflation rate.

Earlier on June 11, 2008 the Reserve Bank today hiked its short term lending rate by 0.25 per cent with immediate effect, a move that is likely to force banks to increase interest rates and help check inflation.” The Reserve Bank of India - has decided to increase the repo rate the central bank said in a statement in Mumbai.The reverse repo rate, at which RBI borrows money from banks in exchange of the government papers, however, has been kept intact at 6 per cent.

The Reserve Bank said the decision has been taken with a view to containing inflation expectations among other things. The RBI statement said:


Purpose:


According to the official statement by the RBI 'The annual policy statement for the year 2008-09 (April 29, 2008) had stated, inter alia, that the overall stance of monetary policy in 2008-09 will broadly be to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.'

Understanding the concept and the relevance of the Policy Definition


The regulation of the money supply and interest rates by a central bank, such as the Reserve Bank of India and Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Monetary policy is one the ways the government can impact the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses.

It regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth. The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.


Role of Reserve Bank of India: Establishment


The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.


Preamble


The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Main Functions Monetary Authority:


Formulates, implements and monitors the monetary policy.


Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and financial system functions.


Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange


Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:


Issues and exchanges or destroys currency and coins not fit for circulation.


Objective:
to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role


Performs a wide range of promotional functions to support national objectives.


Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

Banker to banks:
maintains banking accounts of all scheduled banks.

Basic Economic Concepts Inflation, Interest rates and the RBI

Interest rates measure the price of borrowing money. If a business wants to borrow Rs 1 million from a bank, the bank will charge a specific interest rate that will usually be expressed in terms of a percentage over a given period of time. For example, if the bank loaned the money to the company at a 5% annual rate, the company would need to repay Rs. 1,050,000 at the end of the year. From the c
 

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