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Monetary Policy Group 5 Kapali 05 Prachi 16 Pankaj 21 Nikhil 28 Kedar 40 On Ali 52 Chandra 56
Macroeconomic Policies Fiscal Policy Physical Policy Related to Related to overcomingbudget, government specific problems of theexpenditure, taxation economy Monetary Policy Related to money supply, exchange rate control and bank rate control
Fiscal PolicyUse of “Government Expenditure”, and “taxation” to manage the economy.Purpose of Fiscal Policy Stabilise economic growth, avoiding the boom and bust economic cycleVariables affected by Fiscal Policy in the economy Aggregate demand and the level of economic activity The pattern of resource allocation The distribution of income.
Physical Policy Meant to affect only strategic points of the economyPurpose of Physical Policy Overcome specific problems such as pricing of particular commodity, shortages or surpluses developing in the economy etc.Variables affected by Physical Policy in the economy Price and distribution of specific commodity Investment and production Foreign Trade
Monetary Policy Regulation of supply of Money and Cost and Availability of Credit in the economyPurpose of Monetary Policy Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth Variables affected by Monetary Policy in the economy Interest Rates Liquidity Credit Availability Exchange Rates
Monetary Policy – RBI’s roleDemand for Money Demand for goods/services Ensuring price Instruments such as CRR, stability and ensuring OMO & Bank Rate savings Control on money Control on bank supply, velocity of credit when prices circulation of money rise/fall during inflation
Monetary Policy – Terminology Inflation • Inflation refers to a persistent rise in prices Money Supply (M3) • Total volume of money circulating in the economy • Minimum rate at which the central bank provides loans to commercial Bank Rate banks • Amount of money that banks must set aside with RBI against their Cash Reserve Ratio (CRR) deposits • Percentage of bank funds to be maintained in government and Statutory Liquidity Ratio (SLR) approved securities Repo Rate • Rate at which RBI lends to other banks against government securities Reverse Repo Rate • Rate at which RBI borrows from other banks Capital Adequacy Ratio (CAR) • Capacity of bank meeting the time liabilities and other riskOpen Market Operations (OMO) • Purchase and sale of securities in the open market
Current Rates Inflation • 0.27 (New low in 30 years) Bank Rate • 6.0% CRR • 5.0 SLR • 24.0% Repo Rate • 5.0%Reverse Repo Rate • 3.5% PLR • 12.75% – 13.25% Re/$ • 50.95
CRR MovementBefore 1991 Result• Government raised funds below • Complex, distorted interest rate market rate structure• No depth in Government Securities • Adversely affected viability and Market profitability of banks• Regulation of deposit rates • Transparency and norms could not be• Under developed financial followed strictly markets, Less financial instruments availability
CRR MovementBoost Economy after Rise in CRR to control liquidity, 2001 Slowdown / due to Heavy Capital Inflow & dotcom bubble to curb Re Appreciation CRR Cuts to boost Stable CRR from CRR hikes to economy after 2004 to 2006 curb inflation Sub prime loss / Global meltdown
Inflation MovementCRR hikes proved to Uncontrolled Inflation despite Inflation Down on account Be effective Further CRR hikes of global credit crunch To curb Inflation http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
SLR MovementBanks to made available more funds Stable SLR from& More Efficiency 1998 onwards
Repo and Reverse Repo rates MovementRepo rate reduction due to make credit available at cheaper rates Increased rates to control the liquidity
Exchange Rate MovementSterilization to LAF - To Control Exchange Ratio Control rupee – Outflow of $ from India Market Appreciation
Forex Reserves Position The Surge in Foreign Exchange Reserves Sterilization / Selling bonds & Buying dollarswww.rgemonitor.com/blog/economonitor/248231
Sterilization under MSS Sterilization bonds under (MSS) - April 2004 Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007www.rgemonitor.com/blog/economonitor/248231
18 Current Global ScenarioGlobal GDP -0.6% World trade Tighter credit contraction by 2.8% RecessionEstimated PPPGlobal Growth 0.5% Production Plunge Demand Slump Job losses Aggressive and unconventional measures taken by Governments and central banks
Impact on India Money and credit market Domestic Banks Local Institutions Domestic MFs NBFC Re $Financial Channel
20 Challenges for RBI Growth amid Global economic slowdown
21 Limitations – Monetary Policy 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 Monetary Policy cannot work in isolation!!