CURRENT MONETARY POLICY
Rbi
WHAT IS MONETARY POLICY?
• The process by which the central bank or
monetary authority of a country controls
• (i) the supply of money,
(ii) availability of money, and
(iii) cost of money or rate of interest
TYPES OF MONETARY POLICY
• Expansionary policy:
• –Increases the total supply of money in the
economy
• –Involves decreasing the interest rates to
pump liquidity
• in the market.
• –Government is using since October, 2008
TYPES OF MONETARY POLICY
• Contractionary policy:
• –Decreases the total money supply.
• –Involves raising interest rates in order to
combat inflation
• Government may use in near future
Inflation
• Inflation moved up to 1.51% for the week
• ended October 17, 2009 compared with 0.83%
• for the week ended September 19, 2009.
• •The RBI has revised its inflation estimate
• upward to 6.50% at the end of March 2010
from earlier estimate of 5% in the second
quarter policy review
INSTRUMENTS OF MONEATRY POLICY
• OPEN
MARKET
OPERATIONS
• NET PURCHASE
OF FOREIGN
CURRENCY
ASSETS
• CHANGE IN CRR & SLR
• CHANGES IN
REPO RATE AND
REVERSE REPO
RATE
OPEN MARKET OPERATIONS…..
• RBI undertakes to buy and sell Government
Securities
• from participants in the financial markets.
• •The operations could be undertaken on an
outright basis or repurchase agreements
• Objectives…..
• To absorb or provide liquidity in the market
• To stabilize inflation
• To maintain a fixed exchange rate
CASH RESERVE RATIO….
• The base is the total of the deposits that a
bank has.
• The RBI pays the bank interest on the amount
parked with it
REPURCHASE RATE…..
• Repo rate
• •Discountedinterest rate at which a central
bank repurchases government securities.
• •Induction of some of the Short-term liquidity
in the system.
REVERSE REPURCHASE RATE…..
• Applicable when a country's reserve borrows
• money from banks.
• •Safe proposition.
• fund shortage
being faced by the
reserve.
• money to be
taken out of the
economic system.
STATUTORY LIQUIDITY RATIO…..
• •The amount that the commercial banks require to
• maintain in the form of
• –Cash
• –gold or
• –govt. approved securities
• before providing credit to the customers.
• •Controls the expansion of bank credit.
BANK RATE…..
• The Discount Rate
• The rate of interest which a central bank
charges on
the loans and advances that it extends to
commercial
banks and other financial intermediaries
For 1 year or more
FOREIGN CURRENCY ASSET…..
• •Foreign exchange reserves less gold holdings
•Special drawing rights and
•India's reserve position in the IMF.
• The Central Bank buys up the dollars coming in to
• prevent rupee appreciation.
• •This leads to an expansion in net foreign exchange
• assets of the Central Bank and thus of money
• supply.
• •Classic symptom of impossible trinity difficulties:
• raising interest rates but money supply growth is
• surging.
• •An expansion in money supply will lower interest
• rates.
• •You cannot raise rates, and keep the exchange rate
• pegged at the same time.
Example:
• •If the US hikes the Fed rate, and India stays
• still, capital will flow out and the currency will
• depreciate.
• •If the RBI wants to prevent depreciation of the
• currency, it will have to sell dollars or raise
• rates. Both these are contradicting.
• •Currency pegging forces RBI to also raise
• rates.
• •Thus having a peg means following US
• monetary policy
meaning
• Monetary policy can be summarized as the
Central bank¶s actions to influence the
availability and cost of money and credit in the
economy.
OBJECTIVES
• Price Stability
Economic growth
Exchange rate management
Full Employment
HOW DOES IT WORK
• consider that an economy is growing too fast. This is also referred
to as overheating of the economy:
• a situation that typically happens in the boom phase when GDP
(gross domestic product) growth exceeds the long-term
growth potential of the economy.
• The producers of goods are not able to make enough goods to
meet the rising demand. The resultant demand-
supply mismatch creates inflationary pressures in the economy.
• This situation is regarded as unsustainable, as the high growth
translates into higher inflation.
• In this situation, the RBI raises interest rates to depress
spending and reduce the pressure on inflation.
Tools
• Bank Rate:It is the rate at which RBI,Central Bank,lends money to the
• Commercial Banks.
• Repo Rate:It is rate at which RBI lends money to the Commercial Banks for
• the shorter period of time I.e 365 days.
• Reverse Repo Rate:It is the rate at which RBI borrows money from the
• Commercial Banks.
• Cash Reserve Ratio:Every scheduled commercial bank is required under
• law to keep with central bank a certain proportion of their deposits in cash.
• Statutory Liquidity Ratio:It is the amount which every bank needs to
maintain
• as a percentage of total deposits as cash with the bank.
Ripples
• All the big economies were in recession.
Crisis penetrated into the real economy from the
financial sector.
Crisis has spread among the EME’s (emerging market
economy) through all the three channels-financial ,
• real and the confidence channel.
• Knock on effects of the global financial crisis-
economic slowdown and the
• falling commodity prices
Facts
• Industrial production growth has slackened ,(X-M)= -ve, international
• credit channels remain to be constrained.
• Inflation has decreased according to WPI, but CPI is still showing the
• double figures.
• Crash of financial pillars- Lehman bros.
• Many commercial banks, investment banks, and other financial
• institutions suffered huge loss.
• Global real GDP growth on a PPP basis , is projected to decelerate
from
• 3.7 to 2.2% in 2008 and further to 1.1 in 2009.
Ripples in agri n industry
• Domestic outlook- real GDP growth has declined from 9.3 to
7.8%.
• Agriculture production during the 2008-2009 was considered
to be better
• than the previous year.
• Industry growth- IIP growth decelerated to 3.9% from 9.2%.
• Corporate performance-despite high topline growth the
operating
• margins of the private corporate sector were eroded by higher
input
• costs.
