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A Quick Guide To Four Important Monetary Terms
(Part 2) By Prof. Simplyimp!e
" In t#e !ast edition$ %e !ooked at repo rate
& statutory !i'uidity ratio () and %#at
t#ese measures si*nify for t#e !ar*er
economy and consumers.
" In t#is edition$ %e %i!! try to understand
t#e concepts of Cash Reserve Ratio
(CRR) and Market StabilizationScheme (MSS).
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The Cash Reserve Ratio
" + is a ,ank re*u!ation t#at sets t#e minimum
reser-es eac# ,ank must #o!d to customer
deposits and notes.
" T#ese reser-es are desi*ned to satisfy
%it#dra%a! demands$ and %ou!d norma!!y ,e in
t#e form of currency stored in a ,ank -au!t (-au!t
cas#)$ or %it# a centra! ,ank.
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ecent!y
" T#e BI #as ,een se!!in* / do!!ars to stem t#e
fa!! of t#e Indian upee$ %#ic# #as fa!!en 201
a*ainst t#e / o!!ar since 3anuary.
" For e-ery do!!ar t#e BI se!!s an e'ui-a!ent amount
of rupees is sucked out from t#e system.
" In ot#er %ords$ !i'uidity %i!! remain in t#e system if
BI stops se!!in* do!!ars and a!!o%s t#e rupee to
depreciate.
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An /pdate4
" T#e + #as ,een cut ,y 566 ,asis points in t%osta*es. 7it# t#is$ t#e BI #as ,rou*#t do%n t#e
+ from 81 to its 3anuary 2660 !e-e! of 9.91.
" :o%$ t#e outstandin* deposit portfo!io of t#e Indian,ankin* industry is around s ;
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:o%
" Banks can use t#is money to !end. A cut in +a!so increases ,anks> income. BI does not pay
any interest on t#e cas# ,a!ance kept %it# it.
" Banks can earn 5;.9?5
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o%e-er
" T#is situation can a!so ,e ac#ie-ed if t#e
supp!y of do!!ars increases %it# forei*n
institutiona! in-estors (FIIs) ,uyin* Indiane'uities and !oca! firms ,orro%in* o-erseas.
" T#e com,ination of ade'uate !i'uidity and !o%
po!icy rate can ,rin* t#e ,orro%in* cost do%nfor firms and indi-idua!s.
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Market Stabilization Scheme
" Ti!! t#e time t#e rupee %as risin* a*ainst t#e do!!ar$t#e BI %as a**ressi-e!y ,uyin* do!!ars from t#e
market to stem t#e rise of t#e !oca! currency.
" T#is is ,ecause a stron* !oca! currency #urtseporters> interest as t#eir income$ in rupee terms$
comes do%n.
" For e-ery do!!ar BI ,ou*#t$ an e'ui-a!ent amountof rupees f!o%ed into t#e system and t#at$ in turn$%as sucked out ,y ,onds$ f!oated under t#e market
sta,i!i@ation sc#eme.
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:o%
" T#us t#ere %as a !i'uidity o-er#an* t#at %ascaused ,y t#e inf!o% of do!!ars. T#is forced t#eGo-ernment to mop up t#e rupees ,y creatin* t#eM ,onds.
" M %as introduced ,y %ay of an a*reement,et%een t#e Go-ernment and t#e eser-e Bank ofIndia (BI) in ear!y 266
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ecent /pdate4
" T#e outstandin* M ,onds in BI ,ook are %ort#s.5.0< tri!!ion and out of t#is$ dated securities
account for s.5.;9 tri!!ion %it# t#e rest ,ein* s#ort?term treasury ,i!!s.
" T#e BI p!ans to ,uy ,ack part of t#e M ,onds
to *enerate cas# for ,anks %#ic# can rein-est t#em
in *o-ernment ,onds t#at %i!! ,e f!oated ,et%een
no% and Marc# 2668.
" In ot#er %ords$ ,anks %i!! not ,e re'uired to dip into
t#eir deposit poo! to ,uy Go-ernment ,onds.
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T#erefore
" T#e ,uy ,ack %i!! #e!p t#e ,anks *enerate
!i'uidity and t#e Go-ernment see its ,orro%in*
pro*ramme t#rou*#.
" o%e-er$ t#e response of ,anks to t#e ,uy ,ack
pro*ramme %i!! depend on t#e price of M
,onds.
" ince interest rates can on!y *o do%n in comin*
days$ ,anks may find stayin* in-ested in M
,onds makes ,usiness sense.
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To Sum Up " T#e +as# eser-e atio determines t#e
proportion of ,ank deposits t#at is to ,ekept %it# t#e BI.
" T#e Market ta,i!i@ation c#eme %as
introduced ,y %ay of an a*reement,et%een t#e *o-ernment and t#e BI in
ear!y 266
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ope you #a-e no% understood t#e concept of
+as# eser-e atio (+) and Market ta,i!i@ationc#eme (M).
In case of any 'uery$ p!ease e?mai!
professorCtataamc.com
mailto:[email protected]:[email protected]