Page 124 - DMGT401Business Environment

Unit 5: Monetary Policy

With the help of a statutory provision for licensing and branch expansion of banks, the RBI Notes
has been trying to bring about an appropriate geographical distribution of bank branches.
In order to ensure the security of deposits with banks, the RBI in 1962, took the initiative
to create the Deposits Insurance Corporations.
10. Agriculture Sector: The RBI directs and increases the flow of credit to the agricultural
sector. It has appointed a separate deputy governor in charge of rural credit. It has conducted
many studies and research on the problem of rural credit. It has created a data base on
rural credit through various surveys.
The RBI has been strengthening the co-operative banking structure through the provision
of finance, supervision, and inspection to increase the supply of agricultural credit.
It provides short-term finance at a concessional rate for seasonal agriculture operations
and marketing of crops through co-operative banks. It established the Agricultural
Refinance Cooperation (now known as NABARD) in July 1963 for providing medium-
term and long-term finance for agriculture. It also helped in establishing an Agriculture
Finance Corporation.
11. Industrial Finance: The RBI has either created or has advised and helped in creation of
many development institutions and financial institution at the centre and state level.
These include IDBI, SIDBI, NHB, NCB and UTI. Through these institutions, the RBI has
been providing short-term and long-term funds to the agriculture and rural sectors, to
small scale industries, to medium and large industries and to the export sector.

5.5.2 RBI and Monetary Policy

From its inception, the RBI has followed the policy of controlled expansion, i.e., adequate
financing of economic growth while ensuring reasonable price stability. Expansion of money is
required in developing country for the purpose of development and investment. But this
expansion results in inflation. So the RBI has to be cautious in order to achieve a trade-off
between expansion and inflation. Not only this, the RBI also manages the forex exchange rate
through open market operations, as after liberalisation it is the market forces that decide the
exchange rate.
The keynote of monetary policy can be said to be controlled expansion of bank credit and
money supply, with special attention to seasonal requirement for credit. The RBI regards money
supply and the volume of bank credits as the two major intermediate variables, but it seeks to
control the former through the latter. It is said that money supply doesn't change on its own; it
changes because of certain underlying development with regard to bank credit.

5.5.3 RBI and Credit Control

For the sake of credit control, the RBI resorts to bank rate manipulations, open market operations,
reserve requirement changes, direct action, and rationing of credit and moral suasion. Apart
from employing these traditional methods of credit control, it directly influences commercial
banks' lending policy, rate of interest, and form of securities against loans and portfolio
distribution.
The instrument of monetary policy (methods of credit control) may be broadly divided into the
following parts:
1. Open Market Operations
2. Bank Rate
3. Direct Regulation of Interest Rates on Commercial Banks' Deposits and Loans

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