Rbi Intervention


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  • Rbi Intervention

    1. 1. MG 667: Economic Environment and Policy Presented by: Vivek Jain(07927820) Atul Seksaria(07927839) Is RBI intervention Justified ?
    2. 2. Objective <ul><li>To understand the dynamics and complexity of policies pursued by RBI </li></ul><ul><li>To relate learning of the class to practice </li></ul>
    3. 3. Functions of RBI <ul><li>Acts as the Monetary Authority </li></ul><ul><li>It is the regulator and supervisor of the financial system </li></ul><ul><li>Manager of Foreign Exchange </li></ul><ul><li>Issuer of currency </li></ul><ul><li>Developmental role </li></ul><ul><li>Related functions like a)Banker to Govt and b) Banker to banks </li></ul>
    4. 4. Challenges before RBI <ul><li>Rupee Appreciation </li></ul><ul><li>Forex Reserves </li></ul><ul><li>Capital Account Convertibility </li></ul><ul><li>Economic Growth v/s Inflation </li></ul>
    5. 5. Rupee Appreciation <ul><li>The story so far </li></ul>
    6. 6. Highlights <ul><li>Rupee is at a 9-year high against the USD </li></ul><ul><li>In 2007 alone, INR has appreciated by more than 11% </li></ul><ul><li>All export oriented industries suffering </li></ul><ul><li>IT, Pharma, Commodities and Textiles </li></ul><ul><li>11,000 people were rendered jobless in the textiles/garment sector alone </li></ul>
    7. 7. Steps taken by RBI to check appreciation of Rupee <ul><li>Heavy intervention in the currency market </li></ul><ul><li>USD 3.7 billion increase in the week ended Sep 21,2007 </li></ul><ul><li>The RBI drains liquidity by issuing bonds and treasury bills </li></ul><ul><li>Inference </li></ul><ul><li>The intervention would ensure that the Rupee does not undergo wild swings that would happen RBI’s absence </li></ul>
    8. 8. Forex Reserve <ul><li>India has attracted inflows worth over $35 billion from all sources since early July this year. </li></ul><ul><li>Financial markets continue to experience conditions of surplus liquidity </li></ul><ul><li>India joined the elite group of world's five biggest holders of foreign exchange reserves as it added about $4.5 billion last week to take the kitty to $261 billion. </li></ul>
    9. 10. RBI Intervention <ul><li>RBI has mopped up over $30 billion </li></ul><ul><li>Liberalized Forex Rules </li></ul><ul><li>Volatility in the foreign exchange market exposes foreign exchange reserves to both operational and market risks. </li></ul><ul><li>Depreciation in the value of any reserve currency </li></ul>
    10. 11. Inference <ul><li>Unchecked and untreated, this can have destabilizing effects on the economy. </li></ul><ul><li>An act of faith in India’s strong growth story </li></ul><ul><li>Should India Use Foreign Exchange Reserves for Financing Infrastructure </li></ul>
    11. 12. Capital Account Convertibility <ul><li>Capital Account Convertibility (CAC) </li></ul><ul><ul><li>a monetary policy that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at pre-set, fixed market rates </li></ul></ul><ul><ul><li>allows the easy exchange of local currency (cash) for foreign currency at low rates </li></ul></ul><ul><li>Rationale behind RBI’s intervention: </li></ul><ul><ul><li>free mobility of capital leaves countries open to both sudden and huge inflows as well as outflows, both of which can be potentially destabilizing </li></ul></ul><ul><ul><li>example: East Asian crisis in the late 90s </li></ul></ul><ul><ul><li>phenomenon predominantly affects open economies - India today is in such a situation </li></ul></ul>
    12. 13. <ul><li>RBI’s Intervention : </li></ul><ul><ul><li>Buildup of Forex reserves by another 150-200 billion USD before full CAC is possible </li></ul></ul><ul><ul><li>removal of structural bottlenecks </li></ul></ul><ul><ul><li>introduction and diversification of new players and instruments </li></ul></ul><ul><ul><li>introduction of new technology </li></ul></ul><ul><ul><li>improvement in trading infrastructure </li></ul></ul><ul><li>Inference : Going forward, in the face of further liberalization and fuller CAC, RBI intervention is in the monetary policy is the only way ahead </li></ul>
    13. 14. Economic Growth V/S Inflation (CRR HIKE) <ul><li>HIGHLIGHTS </li></ul><ul><li>Inflation was spiraling out of control </li></ul><ul><li>Had crossed 6% levels in the previous fiscal year </li></ul><ul><li>In a developing economy, this was expected since a lot of money supply is needed to fund projects. That leads to inflation according to the quantity theory of money </li></ul><ul><li>Banks had been cutting rates on new loans in order to improve credit off take </li></ul><ul><li>USD 62 billion has been added as forex reserve in this FY of which USD 48 billion has been in the last 4 months </li></ul>
    14. 15. RBI intervention <ul><li>RBI hiked the CRR in phases gradually to 7.5% </li></ul><ul><li>This led to suction of about INR 71,000 crores from the financial system of the country </li></ul><ul><li>Banks preferred lending money to people/corporations with proven credit-worthiness </li></ul><ul><li>As a result, money available for borrowing decreased </li></ul><ul><li>Gradually this led to a sharp fall in inflation as well ! </li></ul>
    15. 16. Inference <ul><li>The timely intervention by RBI helped suck excess liquidity from the system </li></ul><ul><li>RBI also encouraged overseas investors to buy stocks and bonds to the tune of another 74,800 crores </li></ul><ul><li>The move has ensured that the banks do not further lower their lending rates </li></ul><ul><li>Most important, Inflation has dropped to below 3% for the first time in 5 years !! </li></ul>
    16. 17. Former RBI Governor Dr. Bimal Jalan said at a forum once: <ul><li>“ The East-Asian crisis has demonstrated the vital importance of financial institutions in sustaining the growth momentum and development. It was no longer possible for developing countries to delay the introduction of strong prudential and supervisory norms, and introduce structural reforms to make the financial system more competitive, transparent and accountable. ” </li></ul>
    17. 18. <ul><li>Thank you! </li></ul>