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RBI INTERVENTION  Group 9B By Lakshmi Priya .A (07927817) Mohit Bansal(07927952 ) 05/28/09 Against RBI Interventions
Outline <ul><li>Introduction </li></ul><ul><li>Current Rates </li></ul><ul><li>How does the RBI interfere </li></ul><ul><l...
INTRODUCTION <ul><li>Monetary policy - Management of money supply and interest rates by central banks to influence prices ...
<ul><li>Current policy rates </li></ul><ul><li>Bank rate: 6 </li></ul><ul><li>Repo 7.75 </li></ul><ul><li>Reverse  repo : ...
What RBI is trying to Control? <ul><li>Open capital account </li></ul><ul><li>Pegged currency regime </li></ul><ul><li>Ind...
Confused states of the Trinity <ul><li>Inflation Rises -  Contractionary Policy  </li></ul><ul><li>: To Decrease Money Sup...
Another State of confusion <ul><li>US hikes the Fed rate  </li></ul><ul><li>Capital will flow out :Currency will depreciat...
RBI’s Attempt to dodge this Trinity <ul><li>Sterilised Intervention:   selling of bonds </li></ul><ul><li>Constraints to s...
Efficient Sterilization 05/28/09 Against RBI Interventions
Inefficient Sterilisation 05/28/09 Against RBI Interventions
<ul><li>RBI ran out of stocks of government bonds in May 2004, at the end of 2004. </li></ul><ul><li>M0 is smaller than NF...
CRR <ul><li>Increase of CRR of nearly 1% in 10 months </li></ul>
<ul><li>Used to reduce liquidity in the system </li></ul><ul><li>Reduces the money available for credit . </li></ul><ul><l...
<ul><li>Repo rate : RBI lends money to banks – how the RBI influences interest rates  .  </li></ul><ul><li>Reverse Repo ra...
Increase in Reverse Repo from 01-06
Effects of RBI Intervention <ul><li>Volatility in Exchange Rates  </li></ul>05/28/09 Against RBI Interventions
Growth in Forex Reserves <ul><li>In 2006-07 reserve money growth rose to 23% </li></ul><ul><li>Massive Reserve build up wh...
Effects of RBI Intervention cont.. <ul><li>Rise in Inflation   -  From April 2006 to January 2007  RBI purchased USD 12.6 ...
<ul><li>Lesser growth in the economy -  Reduced the level of investment activity in the economy, ( infrastructure sector) ...
Inflationary pressure
Exports growth is reduced due to appreciating rupee  <ul><li>Erroneous belief -Growth is not affected. </li></ul><ul><li>E...
Conclusion <ul><li>Support to Exporters – Provide Platforms like improving infrastructure, changing Labour Laws , hedging ...
<ul><li>Monetary policy announcements need to be made on preset dates  </li></ul><ul><li>When faced with the impossible tr...
THANK YOU !
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Rbi Intervention

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Transcript of "Rbi Intervention"

  1. 1. RBI INTERVENTION Group 9B By Lakshmi Priya .A (07927817) Mohit Bansal(07927952 ) 05/28/09 Against RBI Interventions
  2. 2. Outline <ul><li>Introduction </li></ul><ul><li>Current Rates </li></ul><ul><li>How does the RBI interfere </li></ul><ul><li>What the RBI is trying to control </li></ul><ul><li>Methods of intervention </li></ul><ul><li>Effects of intervention </li></ul><ul><li>Conclusion </li></ul>
  3. 3. INTRODUCTION <ul><li>Monetary policy - Management of money supply and interest rates by central banks to influence prices and employment </li></ul><ul><li>Expansion or contraction of investment and consumption expenditure. </li></ul>
  4. 4. <ul><li>Current policy rates </li></ul><ul><li>Bank rate: 6 </li></ul><ul><li>Repo 7.75 </li></ul><ul><li>Reverse repo : 6 </li></ul><ul><li>Reserve ratios </li></ul><ul><li>CRR: 7 </li></ul><ul><li>SLR: 25 </li></ul><ul><li>Lending/deposit rates </li></ul><ul><li>PLR: 12.75-13.25 </li></ul><ul><li>Savings bank rate:3.5 </li></ul><ul><li>Deposit rate: 7.5-9.6% </li></ul>
  5. 5. What RBI is trying to Control? <ul><li>Open capital account </li></ul><ul><li>Pegged currency regime </li></ul><ul><li>Independent monetary policy </li></ul><ul><li>Impossible Trinity </li></ul>05/28/09 Against RBI Interventions
  6. 6. Confused states of the Trinity <ul><li>Inflation Rises - Contractionary Policy </li></ul><ul><li>: To Decrease Money Supply </li></ul><ul><li>Interest rates will go up . </li></ul><ul><li>Open C apital account : Money from Abroad. </li></ul><ul><li>Pressure on the rupee to appreciate. </li></ul><ul><li>Central Bank buys up the dollars leading to </li></ul><ul><li>Increased Money Supply. </li></ul>05/28/09 Against RBI Interventions
  7. 7. Another State of confusion <ul><li>US hikes the Fed rate </li></ul><ul><li>Capital will flow out :Currency will depreciate. </li></ul><ul><li>RBI to prevent depreciation: sell dollars or raise rates. </li></ul><ul><li>Currency pegging forces RBI to also raise rates. </li></ul><ul><li>Peg means following US monetary policy </li></ul><ul><li>Autonomous Monetary Policy? </li></ul>05/28/09 Against RBI Interventions
  8. 8. RBI’s Attempt to dodge this Trinity <ul><li>Sterilised Intervention: selling of bonds </li></ul><ul><li>Constraints to sterilisation </li></ul><ul><li>Run out of bonds </li></ul><ul><li>Mounting fiscal costs </li></ul><ul><li>The rates go up and this sucks in more capital flows </li></ul><ul><li>Short term solutions </li></ul>05/28/09 Against RBI Interventions
  9. 9. Efficient Sterilization 05/28/09 Against RBI Interventions
  10. 10. Inefficient Sterilisation 05/28/09 Against RBI Interventions
  11. 11. <ul><li>RBI ran out of stocks of government bonds in May 2004, at the end of 2004. </li></ul><ul><li>M0 is smaller than NFA(!). </li></ul><ul><li>Monetary Stabilisation Bonds were started – but explicit fiscal </li></ul><ul><li>cost; no longer the hidden costs of pegging. </li></ul><ul><li>Forex intervention continued - endeavour to get exchange rate </li></ul><ul><li>back under control. Greater globalisation requires bigger market manipulation - e.g. $12 billion in February 2007 alone. </li></ul><ul><li>Only partly sterilised. </li></ul>
  12. 12. CRR <ul><li>Increase of CRR of nearly 1% in 10 months </li></ul>
  13. 13. <ul><li>Used to reduce liquidity in the system </li></ul><ul><li>Reduces the money available for credit . </li></ul><ul><li>Turbulence in the call money markets due to sudden hikes in CRR </li></ul>
  14. 14. <ul><li>Repo rate : RBI lends money to banks – how the RBI influences interest rates . </li></ul><ul><li>Reverse Repo rate : RBI pays to banks for their excess funds with RBI in form of Govt Securities </li></ul><ul><li>-RBI increases R R wants to reduce liquidity. </li></ul><ul><li>-Financial markets tighten and there is an increase in yields of securities. Banks tie interest rates to these yields. </li></ul><ul><li>- Increase in lending and deposit rates.Less spending </li></ul><ul><li>Bank Rate : rate at which RBI borrows from the bank </li></ul>
  15. 15. Increase in Reverse Repo from 01-06
  16. 16. Effects of RBI Intervention <ul><li>Volatility in Exchange Rates </li></ul>05/28/09 Against RBI Interventions
  17. 17. Growth in Forex Reserves <ul><li>In 2006-07 reserve money growth rose to 23% </li></ul><ul><li>Massive Reserve build up which has not been efficiently sterilised (266.5 billion USD) </li></ul>
  18. 18. Effects of RBI Intervention cont.. <ul><li>Rise in Inflation - From April 2006 to January 2007 RBI purchased USD 12.6 billion (Rs.56, 543.05 crores ).To reduce liquidity raised interest rates </li></ul><ul><li>Tightening of credit - rise in repo rates , a rise in cash reserve ratio and a reduction in rate of interest on cash deposited by banks with RBI. Raise lending rates and reduce the amount of credit disbursed </li></ul>05/28/09 Against RBI Interventions
  19. 19. <ul><li>Lesser growth in the economy - Reduced the level of investment activity in the economy, ( infrastructure sector) , small and medium entrepreneurs ,Housing </li></ul><ul><li>Suddenness of the rupee movement </li></ul>
  20. 20. Inflationary pressure
  21. 21. Exports growth is reduced due to appreciating rupee <ul><li>Erroneous belief -Growth is not affected. </li></ul><ul><li>Exports will become less competitive due to inflation if RBI buys dollars to keep the rupee from appreciating.This will reduce the growth in exports </li></ul><ul><li>REER Real Effective exchange rate - Nominal exchange rate minus inflation. Higher inflation mops up the competitive advantage of a weaker rupee </li></ul>
  22. 22. Conclusion <ul><li>Support to Exporters – Provide Platforms like improving infrastructure, changing Labour Laws , hedging mechanisms . </li></ul><ul><li>Transparency – Long Term policies Dincer & Eichengreen, 2007: On a scale of 0 to 15, RBI stagnated at 2 from 1998 to 2005. Asian average rose from 3 to 5.1. </li></ul>05/28/09 Against RBI Interventions
  23. 23. <ul><li>Monetary policy announcements need to be made on preset dates </li></ul><ul><li>When faced with the impossible trinity, all mature market economies of the world have chosen: floating exchange rate + autonomous monetary policy + open capital account. </li></ul>
  24. 24. THANK YOU !
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