Write a note on the recent changes in RBIís monetary policy

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RECENT CHANGES IN RBIíS MONETARY POLICY.
*Introduction:
~The Reserve Bank Of India is the countryís apex bank and it controls and supervises the countryís monetary and banking structure.
~ The RBIís monetary policy influences the financial markets of the economy and thus helps to ensure economic development of the nation.
~RBIís Monetary policy therefore undergoes changes to suit the demands and needs of the economy so as to bring about economic growth and development.
*GHANGING TRENDS IN RBIíS MONETARY POLICY:
~After the introduction of reforms in the banking structure, various changes have been made in
the RBIís monetary policy.
~These changes reflect the progress of the economy towards financial growth and stability.
~The following are some of the changes in RBIís monetary management:
1)MULTIPLE INDICATOR APPROCH:
^Prior to reforms, the RBI used the Ďmonetary targeting approachí to maintain stability and control inflation by keeping the money supply around certain fixed levels.

^Thus principle worked as banks were the only financial institutions in the economy.
^However, financial liberalization paved way for other non-banking financial institution in the money market.
^Thus, the monetary target approach became obsolete as various factors like money, credit, output, trade, capital flows, different rates of return, exchange rates etc, played equal roles in influencing price stability and inflation.
^This gave rise to Multiple Indicator Approach whereby all the above factors are analysed while framing monetary policy.
2)MONETARY POLICY TRANSMISSION:
^Monetary policy transmission is a channel through which a change in the monetary policy affects the nation.
^Generally four key channels of monetary transmission are considered. They are interest rate, credit availability, asset prices and exchange rate channels.
^The interest rate channel is the most important as it has an immediate effect due to any change and itís also has its impact on other channel.

^Recently, future expectations about asset price, general price and income level has been identified as the fifth key channel of monetary transmission.
3) LIQUIDITY ADJUSTMENT FACILITY:
^Liquidity adjustment facility is a tool in monetary policy that allows banks to borrow money through repurchase agreements.
^Such agreements are used by banks to adjust their day-to-day liquidity requirements.
^Repo rates and Reverse Repo rates are considered under LAF.
^Repo auctions are conducted on a daily basis. The present repo rate is 5.75%.
^Similarly, the present reverse repo rate is 4.50%.
4)PHASING OUT OF SELECTIVE METHODS:
^Greater Market orientation and progress in the financial markets have made the quantitative methods more important in the monetary policy.
^Selective methods have not much significant role and are slowly being phased out.
5)DELINKING MONETARY POLICY FROM BUDGET
^In 1994, the Central Government and the RBI entered into an agreement to phase out the use of ad hoc Treasury Bills that were used to finance Government deficit. Thus, the RBI no longer lends funds to the government to meet its fiscal deficit.
6)DEREGULATION OF ADMINISFERED INTEREST RATE SYSTEM:
^The bank lending rates were formerly fixed by the RBI.
^Now (since 1991) ,the system has been changed.
^The commercial banks fix their rates on the basis of market forces (demand and supply)
7) REDUCTION IN RESERVE REQUIREMENT:
^CRR and SLR have been lowered significantly in the post-reform period.
^This has released more bank funds for lending purpose, that has led to economic growth of the economy while enhancing the bankís profitability.
^the present CRR is 6% of the net demand and time liabilities where as the SLR is 25%.
CAPITAL ADEQNACY RATIO:
^ This is the ratio of minimum capital to risk assets.
^ Over the years, the CAR has been increased.
^At present the CAR is 9%.
9)MICRO-FINANCING:
^The RBI has introduced micro-financing for the rural sector by linking the banking system with Self Help Groups (SHG).
^The RBI along with NABARD has been promoting various such institutions.
10)EXTERNAL SECTOR:
^The RBIís monetary policy is not oriented towards globalization of Indiaís financial markets.
^It is now sensitive towards various changes throughout the world.
^The methods of sterlization and LAF have been used to absorb excess liquidity with a huge inflow of foreign capital.
This provides stability to the financial market.
*Thus, the RBI has brought about various changes in its monetary policy to keep up with the growing demands of a modern, dynamic economy.

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