BY GROUP 9

Monetary policy of India:

Monetary policy is the process by which monetary authority of a country,

generally a central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy

Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability

Controlled Expansion Of Bank Credit One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment The aim here is to increase the productivity of investment by restraining non essential fixed investment

To promote efficiency

Promotion of exports and food procurement operations

Repo rates- 7.75%

Reverse repo rates-6.75%

Bank rate-8.75%

Marginal standing facility rate-8.75

Cash reserve ratio – 4%

Statutory liquidity ratio- 22%

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL).

reduce the liquidity provided under the export credit refinance (ECR) facility from 32 per cent of eligible export credit outstanding to 15 per cent with effect from October 10, 2014.

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions.

continue with daily one-day term repos and reverse repos to ensure smooth liquidity.

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and

continue with daily one-day term repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent

Domestic activity weakened due to a moderate kharif harvest.

The deficiency in the north-east monsoon rainfall has constrained the pace of rabi sowing.

Slowdown in rural wage growth

Slump in industrial production in september 2014

The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand. However, more recent readings of core sector activity, automobile sales and purchasing managers’ indices suggest improvement in likely activity. Exports have buffered the slowdown in industrial activity in Q2 but, going forward, require support from partner country growth.

The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment.

Retail inflation, as measured by the consumer price index (CPI), has decelerated sharply since the fourth bi-monthly statement of September. This reflects, to some extent, transitory factors such as favourable base effects and the usual softening of fruits and vegetable prices that occurs at this time of the year

Source: RBI Bi-monthly policy report

Liquidity conditions have eased considerably in Q3 of 2014-15 due to structural and frictional factors, as well as the fine tuning of the liquidity adjustment framework.

The Reserve Bank determines the need for open market operations (OMO) based on its assessment of monetary conditions rather than on a specific view on long term yields

Merchandise exports declined in October, mainly reflecting sluggish external demand conditions

Some easing of monetary conditions has already taken place. The weighted average call rates as well as long term yields for government and high-quality corporate issuances have moderated substantially since end-August. However, these interest rate impulses have yet to be transmitted by banks into lower lending rates.

probably extending into Q3, conditions congenial for a turnaround –the softening of inflation; easing of commodity prices and input costs; comfortable liquidity conditions; and rising business confidence as well as purchasing activity.

Source: RBI Bi- monthly policy report

RBI must concentrate in reducing Inflation:

Repo<Consumer proce index

RBI must fix the accountability:

forming the MPC committee

Decision by voting

The Government must help RBI:

Fiscal consolidation

Focus on exchange rate

Focus on multiple indicators (GDP, inflation)

Focus more on Inflation

In recent years, India’s inflation has been highest among all G20 countries.

India’s inflation has been higher than its trade competitors.