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RBI Monetary Policy
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RBI Monetary Policy


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  • 1. Monetary Policy Group 5 Kapali 05 Prachi 16 Pankaj 21 Nikhil 28 Kedar 40 On Ali 52 Chandra 56
  • 2. Macroeconomic Policies Physical Policy Fiscal Policy Related to overcoming Related to specific problems of the budget, government economy expenditure, taxation Monetary Policy Related to money supply, exchange rate control and bank rate control
  • 3. Fiscal Policy Use of “Government Expenditure”, and “taxation” to manage the economy. Purpose of Fiscal Policy Stabilise economic growth, avoiding the boom and bust economic cycle Variables affected by Fiscal Policy in the economy Aggregate demand and the level of economic activity The pattern of resource allocation The distribution of income.
  • 4. Physical Policy Meant to affect only strategic points of the economy Purpose 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
  • 5. Monetary Policy Regulation of supply of Money and Cost and Availability of Credit in the economy Purpose 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
  • 6. Monetary Policy – RBI’s role Demand for Money Demand for goods/services Ensuring price Instruments such as stability and ensuring CRR, OMO & Bank Rate savings Control on money Control on bank supply, velocity of credit when prices circulation of money rise/fall during inflation
  • 7. 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 risk Open Market Operations (OMO) • Purchase and sale of securities in the open market
  • 8. 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
  • 9. Monetary Policy – Influence Target Variables -Inflation Policy Variables -Interest rate - Money supply -Real GDP - OMO: Liquidity conditions -Employment - policy rates (CRR, repo etc.) -Consumption -Savings -Investment
  • 10. CRR Movement Before 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 followed strictly • Under developed financial markets, Less financial instruments availability
  • 11. CRR Movement Rise in CRR to control liquidity, Boost Economy after due to Heavy Capital Inflow & 2001 Slowdown / to curb Re Appreciation dotcom bubble CRR Cuts to boost economy after Stable CRR from CRR hikes to Sub prime loss / 2004 to 2006 curb inflation Global meltdown
  • 12. Inflation Movement CRR hikes proved to Uncontrolled Inflation despite Inflation Down on account Be effective Further CRR hikes of global credit crunch To curb Inflation
  • 13. SLR Movement Stable SLR from Banks to made available more funds 1998 onwards & More Efficiency
  • 14. Repo and Reverse Repo rates Movement Repo rate reduction due to make Increased rates to control the liquidity credit available at cheaper rates
  • 15. Exchange Rate Movement Sterilization to LAF - To Control Exchange Ratio Control rupee – Outflow of $ from India Market Appreciation
  • 16. Forex Reserves Position The Surge in Foreign Exchange Reserves Sterilization / Selling bonds & Buying dollars
  • 17. Sterilization under MSS Sterilization bonds under (MSS) - April 2004 Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007
  • 18. Current Global Scenario 18 Global GDP -0.6% World trade contraction by Tighter credit 2.8% Recession Estimated PPP Global Growth Production 0.5% Plunge Demand Slump Job losses Aggressive and unconventional measures taken by Governments and central banks
  • 19. Impact on India Money and credit market Domestic Banks Local Institutions Domestic MFs NBFC Re $ Financial Channel
  • 20. Challenges for RBI 20 Growth amid Global economic slowdown
  • 21. Limitations – Monetary Policy 21 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!!
  • 22. Thank You