RBI Monetary Policy
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Transcript of RBI Monetary Policy
Monetary Policy
Group 5
Kapali 05Prachi 16Pankaj 21Nikhil 28Kedar 40On Ali 52Chandra 56
Fiscal PolicyRelated to budget,
government expenditure, taxation
Physical PolicyRelated to overcoming
specific problems of the economy
Monetary PolicyRelated to money
supply, exchange rate control and bank rate
control
Macroeconomic Policies
Fiscal Policy
Use of “Government Expenditure”, and “taxation” to manage the economy.
Variables affected by Fiscal Policy in the economy
Aggregate demand and the level of economic activity The pattern of resource allocationThe distribution of income.
Purpose of Fiscal Policy
Stabilise economic growth, avoiding the boom and bust economic cycle
Physical Policy
Meant to affect only strategic points of the economy
Variables affected by Physical Policy in the economy
Price and distribution of specific commodityInvestment and productionForeign Trade
Purpose of Physical Policy
Overcome specific problems such as pricing of particular commodity, shortages or surpluses developing in the economy etc.
Monetary Policy
Regulation of supply of Money and Cost and Availability of Credit in the economy
Variables affected by Monetary Policy in the economy
Interest RatesLiquidityCredit AvailabilityExchange Rates
Purpose of Monetary Policy
Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth
Monetary Policy – RBI’s role
Demand for Money
Demand for goods/services
Control on bank credit when prices rise/fall
Ensuring price stability and ensuring savings
Control on money supply, velocity of circulation of money during inflation
Instruments such as CRR, OMO & Bank Rate
•Inflation refers to a persistent rise in pricesInflation•Total volume of money circulating in the economyMoney Supply (M3)
•Minimum rate at which the central bank provides loans to commercial banksBank Rate•Amount of money that banks must set aside with RBI against their depositsCash Reserve Ratio (CRR)
•Percentage of bank funds to be maintained in government and approved securitiesStatutory Liquidity Ratio (SLR)
•Rate at which RBI lends to other banks against government securitiesRepo Rate•Rate at which RBI borrows from other banksReverse Repo Rate
•Capacity of bank meeting the time liabilities and other riskCapital Adequacy Ratio (CAR)
•Purchase and sale of securities in the open marketOpen Market Operations (OMO)
Monetary Policy – Terminology
•0.27 (New low in 30 years)Inflation•6.0%Bank Rate•5.0CRR•24.0%SLR•5.0%Repo Rate•3.5%Reverse Repo Rate
•12.75% – 13.25%PLR•50.95Re/$
Current Rates
Target Variables
-Inflation
-Interest rate
-Real GDP
-Employment
-Consumption
-Savings
-Investment
Policy Variables
- Money supply
- OMO: Liquidity conditions
- policy rates (CRR, repo etc.)
Monetary Policy – Influence
CRR Movement
Before 1991•Government raised funds below market rate
•No depth in Government Securities Market
•Regulation of deposit rates
•Under developed financial markets, Less financial instruments availability
Result•Complex, distorted interest rate structure
•Adversely affected viability and profitability of banks
•Transparency and norms could not be followed strictly
Boost Economy after 2001 Slowdown /
dotcom bubble
Stable CRR from 2004 to 2006
Rise in CRR to control liquidity, due to Heavy Capital Inflow &
to curb Re Appreciation
CRR hikes to curb inflation
CRR Cuts to boost economy after
Sub prime loss / Global meltdown
CRR Movement
http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
Uncontrolled Inflation despite Further CRR hikes
CRR hikes proved to Be effective
To curb Inflation
Inflation Down on account of global credit crunch
Inflation Movement
Stable SLR from 1998 onwards
SLR Movement
Banks to made available more funds& More Efficiency
Repo rate reduction due to make credit available at cheaper rates
Repo and Reverse Repo rates Movement
Increased rates to control the liquidity
LAF - To Control Exchange Ratio – Outflow of $ from India Market
Sterilization to Control rupeeAppreciation
Exchange Rate Movement
The Surge in Foreign Exchange Reserves
www.rgemonitor.com/blog/economonitor/248231
Sterilization / Selling bonds & Buying dollars
Forex Reserves Position
Sterilization bonds under (MSS) - April 2004 Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007
www.rgemonitor.com/blog/economonitor/248231
Sterilization under MSS
18
Global GDP -0.6%
Estimated PPP Global Growth
0.5%
Recession
US
EuropeJapan
Demand Slump
Production Plunge
Job losses
Tighter credit
World trade contraction
by 2.8%
Aggressive and unconventional measures taken by Governments and central banks
Current Global Scenario
Money and credit market
Local Institutions
Domestic Banks
Domestic MFs
NBFC
$ReRe.
Financial Channel
Impact on India
20
Monetary Policy
Fiscal Policy Growth amidGlobal economic slowdown
DeflationRe.
Challenges for RBI
Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation
Monetary policy is restricted by the impact of other government actions, especially Fiscal policy, i.e. decisions about government expenditures and taxation
Problems of an inflexible labour market, inadequate infrastructure and, most important, fiscal policy whose discipline is open to question limits the effectiveness of the Monetary policy
21
Monetary Policy cannot work in isolation!!
Limitations – Monetary Policy
Thank You