9 Main Limitations of the Monetary Policy adopted by the Reserve Bank of India

by Shekar Kumar

The following are the main limitations of the monetary policy adopted by the Reserve Bank:

1. Restricted Scope of Monetary Policy in Economic evelopment!

In reality the monetary policy has been assigned only a minor role in the process of economic development. The monetary policy is not given any predominant role in the process of economic development. The role assigned to the Reserve Bank is minor indeed. The Reserve Bank in e pected to see that the process of economic development should not be hindered for want of availability of ade!uate funds.

". Limited Role in #ontrollin$ Prices!

The monetary policy of Reserve bank has played only a limited role in controlling the inflationary pressure. It has not succeeded in achieving the ob"ective of growth with stability. The former #overnor of Reserve Bank$ I.#. %atel states$& the role of monetary policy in combating inflation is strictly limited and that monetary policy can be effective only if it is a part of an overall framework of policy which includes not only fiscal and foreign e change policy but also what is described as an income policy&. In India$ however$ the monetary policy of the Reserve Bank is not appropriately integrated with fiscal$ foreign e change and income policies.

%. &nfavo'rable Bankin$ (abits!

'n important limitation of the monetary policy is unfavourable banking habits of Indian masses. %eople in India prefer to make use of cash rather than che!ue. This means that a ma"or portion of the cash generally continues to circulate in the economy without returning to the banks in the form of deposits. This reduces the credit creation capacity of the banks. (oreover in India there is predominance of currency in the money supply. This hampers the credit creating capacity of the banks. )ue to high proportion of currency in money supply$ banks have to face the problem of large withdrawals of currency every time they create credit. *ortunately$ the recent trend is increasing deposit ratio in money supply. It is e pected to make money policy more effective.

). &nderdeveloped Money Market!

'nother limitation of monetary policy in India is underdeveloped money market. The weak money market limits the coverage$ as also the efficient working of the monetary policy. The money market comprises of the parts$ the organised money market and unorganised money market. The money policy works only in organised money market. It fails to achieve the desired results in unorganised money market.

*. E+istence of Black Money!

The e istence of black money in the economy limits the working of the monetary policy. The black money is not recorded since the borrowers and lenders keep their transactions secret. +onse!uently the supply and demand of money also not remain as desired by the monetary policy. In the words of ,. %andit$ -Black money is rightly regarded as a threat to the official money credit policy mechanism to manage demand and price in several sectors of the economy.

,. #onflictin$ -b.ectives!
'n important limitation of monetary policy arises from its conflicting ob"ectives. To achieve the ob"ective of economic development the monetary policy is to be e pansionary but contrary to it to achieve the ob"ective of price stability a curb on inflation can be realised by contracting the money supply. The monetary policy generally fails to achieve a proper coordination between these two ob"ectives.

/. Infl'ence of 0on1Monetary 2actors!

'n important limitation of monetary policy is its ignorance of non.monetary factors. The monetary policy can never be the primary factor in controlling inflation originating in real factors$ deficit financing and foreign e change resources. The Reserve Bank has no control over deficit financing. It cannot regulate the deficit financing$ which affects money supply considerably.

3. Limitations of Monetary Instr'ments!

'n important limitation of monetary policy is related to the inherent limitations in the various instruments of credit control. There are limitations regarding fre!uent and sharp changes in the bank rate$ as these are supposed to conflict with the development ob"ectives. (ost bank rates are virtually fi ed and mutually unrelated so that the scope for ad"ustment is very limited. The margin re!uirements have tended to be so high for most of time due to prolonged inflation$ that the scope for further increase in them is limited. The +RR and S/R have also been fi ed very high locking most of the funds in low yielding assets. These limitations of monetary instruments hamper the smooth working of monetary policy.

9. 0ot Proper Implementation of the Monetary Policy!

Successful application of monetary policy is not merely a !uestion of availability of instruments of credit control. It is also a !uestion of "udgement with regard to timing and the degree of restraint employed or rela ation allowed.

0owever$ past e perience shows that Reserve Bank&s credit restrictions have always fallen short of the re!uired e tent of restraint. The Bank has adopted a hesitant attitude in the field of monetary control. In short$ the monetary policy of the Reserve Bank suffers from many limitations. It re!uires improvements in many directions

Company Fixed Deposits

Company Fixed deposits earn a fixed rate of return over a period of time. Financial institutions and NonBanking Finance Companies (NBFCs) also accept such deposits. Deposits thus mo ili!ed are governed y the Companies "ct under #ection $%". &hese deposits are unsecured' and hence incase of any default y the company' the investor cannot sell the Certificates to recover his capital. &his makes company Fixed Deposits a risky proposition for investment.

Company Fixed Deposits are ade(uate for regular income )ith the option to receive monthly' (uarterly' half-yearly' and annual interest income. *oreover' the interest rates offered are higher than anks. Companies are permitted to mo ili!e deposits from investors as indicated elo)+

,p to -$. of their net )orth from their pu lic/ and ,p to 01. of their net )orth from the share-holders and others.

Net )orth means paid-up capital plus free reserves' minus miscellaneous expenditure' if any.

Features of Company Fixed Deposits:

Company Fixed Deposit2s are non transfera le that means there is no fear of FD receipt eing stolen. 3n case it falls into )rong hands' it cannot e misused. &he FD holder in such a case should )rite to the company )hich shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one. No income tax is deducted at source if the interest income is upto 4s $1115-in one financial year. " person can spread his investment in more than one company' so that interest from one company does not exceed 4s. $1115- . "s an investor it is al)ays prudent to go for the company fixed deposits for a short term duration i.e. for a tenure of 0-6 years depending upon the rate of interest. &his )ill help the investor to s)itch to other company if need e 4ecently' nomination facility has een introduced in company fixed deposits. Where Not To Invest

Companies )hich pay a rate of interest higher than 07. Companies )hich are not paying regular dividends to their shareholders. Ne) companies elonging to first generation of promoters )hich have yet to prove their credit )orthiness.

"void private limited companies' and partnership firms and other un-incorporated odies. #uch companies are under no o ligation to pu lish their alance sheets )orking results and it is' therefore' very difficult to 8udge their performance.

Companies )hose alance sheets sho) accumulated losses. Companies )ith a poor li(uidity position and elo) investment grade rating.

Benefits of investing in Company Fixed Deposits

&he enefits of company deposit are numerous like superior returns from reputed companies' fixed and assured returns'premature encashments' simplicity of transactions' &D# enefits' )ide choice' "ll these features have made company deposits a preferred instrument of investment. *entioned elo) are a fe) of the advantages of a company FD+

9igh interest. #hort-term deposits. :ock-in period is only ; months. No 3ncome &ax is deducted at source if the interest income is up to 4s $'111 in one financial year 3nvestment can e spread in more than one company' so that interest from one company does not exceed 4s. $'111

- #ee more at+ http+55finance.oriyaonline.com5company<fixed<deposits.html=sthash.*>u!6mem.dpuf

Company Fixed Deposits in India Filed in Uncategorized0 comments

Company FD Market in India The History Company Fixed Deposit market in India has an interesting phase of e ol!tion" It gre# o!t of the need of Corporate $ector for raising short term finance and re%!irements of small in estors to earn s!perior ret!rns as compared to ret!rns offered &y the 'anks" The concept of company fixed deposits #as started in india in ()*+ &y 'a,a, Capital -td"&y la!nching first e er Company Fixed Deposit of .&eroi /ro!p 0ast India Hotels -td"1no# 0IH -td"2"

company fixed deposits in indiaThe s!ccess of 0ast India Hotels prompted others pri ate and p!&lic sector companies #hich started accepting deposits from p!&lic"

$ince then company deposit market has gro#n &y leaps and &o!nds" Today3 company deposit market has gro#n to approximately 4s"563000 crores" H!ndreds of top companies &elonging to rep!ted ind!strial ho!ses like Tata3 'irla3 0scorts3 /odre, etc" and go ernment companies like HUDC. are accepting deposits from p!&lic" The n!m&er of depositors ha e increased to aro!nd 6 million"

The &enefits of company deposit are n!mero!s like s!perior ret!rns from rep!ted companies3 fixed and ass!red ret!rns3 premat!re encashment3 simplicity of transactions3 TD$ &enefits3 #ide choice3 7ll these feat!res ha e made company deposits a preferred instr!ment of in estment"

'asic Feat!res of Company Fixed Deposits in India8

Company Fixed Depositz are non transfera&le that means there is no fear of FD receipt &eing stolen" In case it falls into #rong hands 3it cannot &e mis!sed" The FD holder in s!ch a case sho!ld #rite to the company #hich shall iss!e d!plicate deposit receipt !pon exec!tion of an indemnity and cancel the pre io!s one" 9o income tax is ded!cted at so!rce if the interest income is !pto 4s 6000:;in one financial year"

.ne can spread his in estment in more than one company3 so that interest from one company does not exceed 4s" 6000:; F!rther3 ad antage of in esting in company fixed deposits is that one can analyse the company &efore in esting in it &eca!se companies accepting deposits are old;esta&lished rep!ted companies #ith pro en track records" It is also important that company fixed deposit sho!ld &e made for short term 3 i"e"3 ten!re sho!ld &e for (;< years depending !pon the rate of interest"This #ill help the in estor to s#itch to other company if need &e 4ecently3 nomination facility has &een introd!ced in company fixed deposits

+all money
*rom 1ikipedia$ the free encyclopedia
234

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (October 2013)
#all money is a short term finance repayable on demand$ with maturity period of one day to fifteen days$ used for inter bank transactions. +ommercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash ratio from time to time which in turn

affects the amount of funds available to be given as loans by commercial banks. +all money is a method by which banks lend from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money is known as call rate. It is a highly volatile rate that varies from day.to.day and sometimes even from hour.to.hour. There is an inverse relationship between call rates and other short.term money market instruments such as certificates of deposit and commercial paper. ' rise in call money rates make other sources of finance such as commercial paper and certificates of deposit cheaper in comparison for banks raise funds from these sources. The term #all money in international market is usually referred to the short term financing by banking institution to the brokers for maintaining the margin account. It is different from the term loanas the schedule for the payment of interest and principle is not fi ed. Since$ the loan can be called at any time$ it is riskier than other forms of loan. 1hatsoever$ it helps in meeting the li!uidity needs at short notice.

Definition of 'Call Money Rate'

&he interest rate on a type of short-term loan that anks give to rokers )ho in turn lend the money to investors to fund margin accounts. For oth rokers and investors' this type of loan does not have a set repayment schedule and must e repaid on demand.

#all Money Rate

45eet

6hat it is! The call money rate is the interest rate on the loans banks make to brokerage firms that are borrowing to fund transactions in their clients5 margins accounts. Sometimes the call money rate is also called the 6broker loan rate$6 and it is a rate that is generally not available to individuals. (o5 it 5orks7E+ample! /et5s assume that Broker 789 is a brokerage firm that is going to purchase several thousand shares of +ompany 'B+ on behalf of a large client who wants to purchase the shares on margin. The shares cost :;.< million$ and the client agrees to pay Broker 789 for the shares in ;= days. Because Broker 789 believes the client will pay the money back as planned$ Broker 789 borrows :;.< million in call money from BigBank so that Broker 789 and its client can buy the shares now. BigBank does not establish a payment schedule for Broker 789 because Broker 789 e pects to complete the transaction relatively !uickly. 0owever$ BigBank reserves the right to call the loan >i.e.$ re!uire Broker 789 to repay the :;.< million immediately? at any time. BigBank sets the call money rate at /IB@R A B.3<C. If the bank chooses to call the loan before the ;= days is up$ Broker 789 can issue a margin call to its client$ thereby re!uiring the client to repay the :;.< million immediately as well.

6hy it Matters! The call money rate is a cost brokerage firms pay to finance margin accounts or trade for their own accounts. Because call loans are unsecured and callable$ they are in some ways riskier than other loans$ but they also provide short.term li!uidity to the financial markets.

*ost developed country central anks evolved from private anks' not in a ang' ut over a long period of time. (?oodhart' 0>>%/ Capie' et. al' 0>>7). 9istorians of central anking therefore de ate the (uestion+ )hen did each @protoA central ank ecome a @realA central ankB &his de ate naturally raises the (uestion+ )hat exactly is the definition of a central ank' and as a related matter' )hat functions must a ank perform to e properly called a central ankB &his (uestion is of historical interest ecause to understand the role of central anks in development' one must determine )hen central anks )ere actually functioning. Because of the slo) evolution of @protoA central anks to actual ones' this is not an easy (uestion to ans)er.

*ost historians identify the follo)ing functions as eing historically essential to the operations of central anks+ (0) unifying and issuing the country2s ank notes/ (-) acting as the government2s ank/ (6) acting as the commercial anks2 ank/ (7) serving as a lender of last resort to the anking and even the financial system as a )hole/ ($)

Conducting monetary policy to manage the foreign exchanges and the price level. Cther activities have een added to this list+ (;) conducting monetary policy to manage the overall level of economic activity and (D) allocating credit to promote national goals. &his list is contentious )ith historians' )ith many claiming that one or the other of these is the sina (ua non of central anking' and )ith most authorities ultimately thro)ing up their ; hands and declaring that may e they can2t agree on ho) to define a central ank' ut they kno) one )hen they see it.7 (Capie' 0>>>)

&here are at least three other roles of central anks that are less considered. Cne is the distri utive role of central ank policy. Central anks2 policies can have differential impacts on different classes and groups+ )orkers and capitalists' de tors and creditors' finance and industry' those operating in traded and non-traded goods. :inking this to the political economy of central anking' for example' ankers may oppose expansionary monetary policy ecause it might lo)er real interest rates and raise inflation' )hereas )orkers and industrialists may prefer looser policy.

" second less-kno)n role is the political role of central anks. &hese days' this role is primarily discussed in the context of )hether or not the central ank is independent of the government (as opposed to e integrated into the government) )ith a focus' primarily' on the impact of central ank @independenceA on inflation. But the political role of central anks is much more multi-faceted than this. During the period of de-coloni!ation follo)ing the second )orld )ar' it )as recogni!ed that y promoting financial unification' central anks can play an important political role in helping to esta lish national sovereignty and unity. *ore recently' central anks )hich are relatively independent from government often represent and promote particular interests' constituencies and ideologies in the pu lic and private spheres and there y affect the color and tenor of overall political de ate over economic policy (Epstein' 0>%-). 3n recent times' these have often een aligned )ith those in financial circles' including external actors like the 3*F' in promoting financial li erali!ation' inflation targeting and the elimination of capital controls. By contrast' central anks that are more integrated into government are more likely to promote policies and procedures that are framed more closely y government priorities and reigning ideologies.$

" third underappreciated role is the allocative role+ central ank policy can deli erately or inadvertently affect the profita ility and access to credit of different industries. &his developmental role is currently under-emphasi!ed' relatively to the other t)o. 3n short' historically central anks have played many and diverse roles+ Central anks have accumulated these roles in fits and starts' some first as private' government connected anks' some as @properA pu lic institutions. 3n any event' it is clear that the neo-li eral version of central anking has picked a highly truncated version of this list.