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Sem 5 Prep
← Money & BankingThe RBI and monetary policy

Formulas for this chapter

CRR, SLR and lendable funds

CRR amount = CRR% x NDTL SLR amount = SLR% x NDTL Lendable funds = NDTL x (1 - CRR% - SLR%)

Whenever a question gives NDTL and the two ratios. CRR is cash with the RBI and earns nothing; SLR is government securities and earns a return but cannot be lent.

NDTL
Net demand and time liabilities, in practice approximated by total deposits
CRR%
Cash Reserve Ratio, about 4.5%
SLR%
Statutory Liquidity Ratio, about 18%

Credit multiplier

Credit multiplier = 1 / (CRR% + SLR%) Total credit created = fresh reserves x multiplier

When asked how much credit the banking system can create from an injection, or what a change in a ratio does to total credit. An OMO purchase injects reserves; a sale absorbs them.

fresh reserves
New cash entering the banking system, from an OMO purchase, a CRR cut or a deposit inflow

Cost of a repo or MSF borrowing

Interest = principal x rate x days / 365

Any liquidity-window question. Use the repo rate for normal borrowing and the MSF rate beyond the limit; the difference between them is the penalty for going to the ceiling.

days
Tenor of the repo, most often 1 day but auctions run to 14 days and longer

The LAF corridor

SDF (floor) = repo - spread MSF (ceiling) = repo + spread Corridor width = MSF - SDF

When asked where the overnight rate can sit. The spread has been 25 basis points on each side, so the corridor is 50 basis points wide and slides with the policy repo rate.

spread
Distance from the policy repo rate to each edge of the corridor
Step 1 of 29
The ideaTheory

A thermostat for money

A room gets too hot, so the thermostat cuts the heating. Too cold, and it turns it up. Nobody in the room decides; the device does.

The RBI is a thermostat for the quantity and the price of money. When prices rise too fast it makes money dearer and scarcer. When the economy stalls it does the reverse.

Everything in this chapter is either the wiring of that device (how the RBI is built) or its dials (the policy tools).

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