Banking & Monetary Policy

Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates.

If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most. This is so because, with lower rates, borrowing becomes cheaper and thus, investors invest more in things like stocks, real estate, and other assets, which, are expected to rise in value. Owners of such assets experience an upward social mobility and a widening of the social disparity. On the other hand, possibly, small investors, who have less money invested, will not immediately notice such advantages.

• Also, regions of expansionary monetary policies open employment opportunities but not all the employment opportunities lower income gap. The dominant employment in high-wage-generating activities like finance or technology industries might expand more than low-wage occupation hence widening the gap in wages.

While the dampening effect of expansionary monetary policy or an increase in the interest rate to tame inflation may prove particularly lethal to lower-income earners, not to mention perhaps restricted credit due to high cost of borrowing, measures put in place to control inflation may slow down job creation, especially in areas where low wage earners work.

In conclusion, monetary policy works in the general economy, and it deepens income and wealth inequality since its winners are the high-income earners while its losers are the low-income earners.

Monetary policy and banking regulations impact the financial market stability in several ways, including:

Interest rates: Monetary policy will have an impact on interest rates because it influences the cost of borrowing for people and businesses. This determines the actual amount of money that people and businesses spend and invest.

Bank balance sheets: This monetary policy can affect the liability side of bank balance sheets.

Risk premiums: Monetary policy may impact the risk premiums in financial markets.

Asset prices: Monetary policy affects the asset prices of a financial system, therefore impacting the stability of the financial system.

Credit losses: Monetary policy impacts the rate of default by firms and therefore impacts credit losses on loans to those firms.

Macroprudential policies: Macroprudential policies are necessary correct imbalances in credit and asset markets.

1. Maintaining Adequate Reserves: Banks are supposed to maintain an absolute amount of cash reserves under the respective regulation-such as Cash Reserve Ratio or CRR. The reserves offer capacity for any cash claims that may occur in an unusual way from their depositors. Despite the fact that maintaining such reserves generates no interest, they provide liquidity for money at the bank’s end.

2. Asset/Liability Mismatch Management: They control their asset (loans and investments) and liability maturity profile to storage the inflow from the maturity of asset liability outflow thus minimizing the factor of liquidity risk.

3.Lending and Interbank Market: Also, banks can borrow from other banks in the interbank market or rely on short term funding instruments like repos if funds are immediately required. It would thus enable the servicing of their short term liabilities without compelling the sale of long term assets that would fetch high prices in the market.

4. Liquidity Pool: They possess a pool of HQLAs that can be sold easily at any time, amongst which are government bonds ,inter alia to allow the generation of cash in case of a thick of liquidity.

5. Diversification of funding source: The use of funding by banks reduces on distinct sources of funding for instance retail deposits, wholesale funding, bonds and yet reduces the risk of a short supply of liquidity.

6. Profitability through Lending and Investments: The liquidity that banks establish with regard to income earning activities for loans and securities would guarantee that liquid assets are properly utilized to generate profits without compromising on the capacity to meet its obligations.

This strategic management ensures availability of liquidity and profitability with reduction of the probability of high liquidity.

India plan for school Education and Literacy Department has been allocated ₹73,008 crore in the 2024- 25 budget. At the fund level most funds or 51 percent have been provided to the scheme Samagra Shiksha Abhiyan (SSA) with ₹37,010 crore to train teachers and provide better technology to make education more digital in rural regions as well.

The PM Schools for Rising India Initiative also aims to upgrade 14,500 schools with modern infrastructure and technology through a central allocation of ₹18,128 crore over five years. Further, ₹6,000 crore has been allocated to scale digital learning in these schools.

Zero Budget Natural Agriculture-ZBNA is at ₹101 crore, while Midday Meal Scheme-MDM is at ₹1,731 crore, whereas, Operational Integrated Child Development Service-OICDS is at ₹5,759 crore and Nutritional meals in schools-PM-POSHAN scheme is at ₹12, 467 crore but occupies 17% only. School education has been budgeted at slightly more than last year, that is at 0.7% more than last year indicating a gradual restoration from cuts made in 2020-21 and 2021-22.

The allocation for higher education amounts to ₹47,620 crore. The maximum allocation has been to Central Universities at 33% of the total. Then comes “IITs” at 22%, followed by “NITs” at 11%. Allocations for Central Universities and NITs have increased by 29% and 5% respectively, whereas the funds for the UGC have come down to a significant 61%.

1. Maintaining Adequate Reserves: Banks are supposed to maintain an absolute amount of cash reserves under the respective regulation-such as Cash Reserve Ratio or CRR. The reserves offer capacity for any cash claims that may occur in an unusual way from their depositors. Despite the fact that maintaining such reserves generates no interest, they provide liquidity for money at the bank’s end.

2. Asset/Liability Mismatch Management: They control their asset (loans and investments) and liability maturity profile to storage the inflow from the maturity of asset liability outflow thus minimizing the factor of liquidity risk.

3.Lending and Interbank Market: Also, banks can borrow from other banks in the interbank market or rely on short term funding instruments like repos if funds are immediately required. It would thus enable the servicing of their short term liabilities without compelling the sale of long term assets that would fetch high prices in the market.

4. Liquidity Pool: They possess a pool of HQLAs that can be sold easily at any time, amongst which are government bonds ,inter alia to allow the generation of cash in case of a thick of liquidity.

5. Diversification of funding source: The use of funding by banks reduces on distinct sources of funding for instance retail deposits, wholesale funding, bonds and yet reduces the risk of a short supply of liquidity.

6. Profitability through Lending and Investments: The liquidity that banks establish with regard to income earning activities for loans and securities would guarantee that liquid assets are properly utilized to generate profits without compromising on the capacity to meet its obligations.

This strategic management ensures availability of liquidity and profitability with reduction of the probability of high liquidity.