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Monetary Policy and the RBI - Short Trick

The RBI, policy rates, qualitative tools, the MPC, benchmarks, PSL and NPAs — one sentence each

7 trick sentences18 pairs6 parts
0 / 13 learned · 0%
How to read
  • Guru Ram Each coloured word = one name in the list, shown below in the same colour
  • Panda Two colours in one word = two names
  • ➜ Order the numbered order matters · ⇄ Any order no order
1

The Reserve Bank of India

The RBI’s journey from 1926 to 1949, three Governors and the four parts of the forex reserves.

Trick 1

The RBI’s journey

➜ oldest to newest

Hina actually came to Mumbai with Nani.

  1. 1Hilton Young Commission1926 — recommended a central bank
  2. 2RBI Act1934
  3. 3Calcutta — the founding1 April 1935 — a private-sector body then
  4. 4Mumbai head office1937 — moved from Calcutta
  5. 5Nationalisation1 January 1949 — ownership to the Government of India

The Act is of 1934, the founding of 1935 — one year apart · the RBI is a statutory body · for a while it was also the central bank of Pakistan and Burma · Section 7 — the central government may direct the RBI in the public interest.

Pairs

Governors of the RBI

3 sentences

Oscar batted first.

Osborne Smith=First Governor of the RBI

A desi boy became the first Indian captain.

Chintaman Dwarkanath Deshmukh=First Indian Governor

Sanjay wears jersey twenty-six.

Sanjay Malhotra=Present Governor — the 26th

The Governor is appointed by the central government · term three years.

Trick 2

Four parts of the forex reserves

⇄ Any order

Farmer Gopal sells rice.

  1. Foreign currency assets
  2. Gold
  3. Special Drawing Rights (SDR)
  4. Reserve tranche

Internal debt is handled by the RBI, external debt by the government itself · too much foreign currency in the market — the RBI buys; too little — it sells.

2

Quantitative Tools — CRR, SLR and the Rates

How CRR differs from SLR, and how to tell the Bank Rate, repo, reverse repo and MSF apart.

Pairs

CRR and SLR

2 sentences

Cash sits with the RBI and earns nothing.

CRR — Cash Reserve Ratio=Part of net deposits, in cash only · kept with the RBI · no interest

Stella keeps eighteen-carat gold in her own safe.

SLR — Statutory Liquidity Ratio=18% · gold, cash, government securities · the bank may keep it with itself · earns interest

Together they are the statutory reserve requirement · in inflation CRR, SLR, the Bank Rate, repo, reverse repo, MSF and SDF all go up; in a slowdown all come down.

Pairs

Policy rates — who lends to whom, for how long

4 sentences

The band played long and got fined.

Bank Rate=The RBI’s long-term loans to banks · the penal rate — charged when CRR or SLR is not kept · = repo + 0.25%

The reporter took a short loan.

Repo rate=The RBI lends to banks short-term · the policy (benchmark) rate · SLR securities may not be pledged

Reverse gear sends the car back.

Reverse repo rate=Banks park money with the RBI and earn interest · the RBI pledges securities · below the repo rate

Mark takes a one-day loan at eleven.

MSF — Marginal Standing Facility=2011 · a one-day loan · SLR securities may be pledged · a penal rate · = Bank Rate = repo + 0.25%

SDF (Standing Deposit Facility) — April 2022, repo − 0.25%, the RBI pledges no security; that is what separates it from reverse repo · LAF — 2000 (the REPO market) · LTRO — 2020, during Covid, long-term loans at the repo rate · OMO — in inflation the RBI sells securities, in a slowdown it buys.

3

Qualitative Tools

To whom the money goes and on what terms — five tools.

Trick 3

Five qualitative tools

⇄ Any order

Mary cooked crispy momos daily.

  1. Margin requirementraised in inflation
  2. Consumer credit regulationin inflation harder terms, bigger down payment
  3. Credit rationingin inflation more to investors, in a slowdown more to consumers
  4. Moral suasionno order, only persuasion
  5. Direct actionagainst banks that ignore directions

With a 20% margin, an asset worth ₹1 crore fetches a loan of only ₹80 lakh.

4

The Policy Framework and the MPC

The Urjit Patel committee, the Monetary Policy Committee and its external members.

Pairs

The committee and the MPC — years and numbers

3 sentences

Urmila read thirteen pages.

Urjit Patel committee=2013 · the sole objective of monetary policy — controlling inflation · target 4% ± 2% · based on the CPI · review every 60 days · a committee to frame policy

Mohan came on the sixteenth with six friends.

Monetary Policy Committee (MPC)=Created in 2016 by amending the RBI Act · 6 members — three from the RBI, three from the government · chaired by the RBI Governor · decisions by majority

Experts from outside stay four years.

External members of the MPC=Term of four years

On a tie the Governor has a casting vote — but no veto · if the target is missed for nine months running, a report goes to the Ministry of Finance · low rates = expansionary, cheap, easy, dovish (the dove is gentle) · high rates = contractionary, dear, tight, hawkish (the hawk is fierce).

5

The Money Market and Benchmarks

The lengths of call, notice and term money, and the four interest rate benchmarks.

Trick 4

The call money market — lengths

➜ shortest to longest

Copy notes from Tina.

  1. 1Call money1 day
  2. 2Notice money2 to 14 days
  3. 3Term money15 to 364 days

The rate here is the call rate — the most unstable · largest in the world London (LIBOR), in India Mumbai (MIBOR).

Trick 5

Four interest rate benchmarks

➜ oldest to newest

Ben bakes muffins early.

  1. 1Benchmark Prime Lending Rate (BPLR)
  2. 2Base Rate2010
  3. 3MCLR — Marginal Cost of Funds based Lending Rate2016
  4. 4EBLR — External Benchmark Lending Rate2019

EBLR = external benchmark + the bank spread · the external benchmark is one of four — the repo rate, the yield on a 91-day or 182-day treasury bill, or a benchmark from Financial Benchmark India · with EBLR the repo rate reaches your EMI directly.

6

Prudential Norms and Regulators

PSL targets, the classes of NPA, the laws against NPAs, and sector ↔ regulator.

Pairs

PSL — each bank’s target

3 sentences

The commerce teacher turned forty.

Scheduled commercial banks=40% · foreign banks with fewer than 20 branches also 40%, with no sub-targets

A rural boy and his small sister scored seventy-five.

Regional Rural Banks · Small finance banks=75% for both

The urban babu retired at sixty.

Urban cooperative banks=60% — it used to be 75%

PSL components — agriculture 18% (small and marginal farmers 10%), weaker sections 12%, micro enterprises 7.5%, others 25% · a bank that misses its target buys PSL certificates or deposits the shortfall in RIDF (NABARD), UIDF (NHB) or SEDF (SIDBI).

Trick 6

Three classes of NPA

➜ mildest to worst

Sunny’s dog got lost.

  1. 1Sub-standard assetfirst 12 months after becoming an NPA
  2. 2Doubtful assetsub-standard for 12 months
  3. 3Loss assetevery attempt at recovery has failed

A loan is an NPA when principal or interest is unpaid for 90 days (for farm loans, the crop cycle) · SMA-0 up to 30 days, SMA-1 30–60, SMA-2 60–90 · net NPA = gross NPA − provisioning.

Trick 7

Steps against NPAs

➜ oldest to newest

Dad called Sonu inside for breakfast.

  1. 1DRT — Debt Recovery Tribunals1993 — Narasimham committee · 29 at first, 39 today
  2. 2CIBIL2000 — the CIBIL score
  3. 3SARFAESI Act2002 — 60 days notice, then auction of the pledged property · ARCs
  4. 4IBC — Insolvency and Bankruptcy Code2016 — NCLT · 180 days (270 in some cases)
  5. 5Bad bank2021 — NARCL, to buy ₹2 lakh crore of NPAs
Pairs

Sector — regulator

3 sentences

Seema trades shares.

SEBI=The share market

Irfan buys insurance.

IRDAI=Insurance

PF gives a pension.

PFRDA=Pension

Lending and deposits — the RBI · housing — NHB · the FSDC (2010) is chaired by the Union Finance Minister · Banking Ombudsman 1995 (15 of them) · Integrated Ombudsman Scheme 12 November 2021 · Basel I 1988, Basel II 2004, Basel III 2010 — issued by the BIS (1930, Basel, Switzerland); the RBI joined the BIS in 1996.

Read the full chapter for the complete notes — a trick helps you remember the list; understanding comes from the notes.