India Monetary Policy

Indian Monetary Policy SP Jain Center of Management ,Singapore

"…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
Elements of financial system– British Rule – 1757 to 1947
Rupiah – Persian Gulf –today in Bahrain for fills denomination
RBI – 1935 – Pvt Bnk ; 1949 Ntnlsd – broader scope
Major initiatives of RBI were to :
Credit to industry, agriculture & small business
Penetrating rural areas, promoting agri & indstrl credit co-optvs
Fostering savings through deposit insurance & postal schemes
Credit guarantee corporations to cover loans to small traders, transport operators & self employed people
Nationalised 14 major pvt banks in ’69 & 6 more in ’80
Branches exploded from 7000 in ’69 to 60000 in ‘94
“ RBI ka usool”

“ Dadas & their dadagiri………”
R N Malhotra : develop money markets, setup National Housing Bank, catalyze the flow of credit through commercial banks.
S Venkitaramanan : adopt IMF stabilization program, Rupee being devalued, launch the programme of economic reforms
Dr. C Rangarajan : introductions of new institutions & instruments, establishing unified exchange rate, historic memo – between bank & govt – cap – adhoc treasure bills.
Dr. Bimal Jalan : weathering Asian crisis, improving transperancy & central bank communications, strengthning BOP & FOREX, low inflation & soft interest rates
Dr. Y V Reddy : Monitoring BOP, ECB, central-state financial relations

How does monetary policy affect the economy?
Money Supply in the Economy
Inflation
Jobs/Wages
Exporter/Imports
Interest Rates/ Savings

What are the objectives of Indian monetary policy?
Maintain price stability
Flow of credit to the productive sectors of the economy.
Stability for the national currency
Growth in employment and income .

What are the tools of Indian monetary policy? OMO CRR REPO SLR BANK RATE

Evolution of Monetary Policy in India
After the crisis in 1991, stabilization went simultaneously with structural reforms
Change in context fundamentally altered the manner in which monetary policy began to be formulated
macroeconomic and price stability received greater emphasis.
Continuous rebalancing of priority between growth and price stability
Financial stability ascended the hierarchy of monetary policy objectives in mid 1990s.

The operating framework of monetary policy underwent a transformation during the 1990s.
In mid 1990s, the RBI switched to a multiple indicator approach
Administered interventions in 1970s and 1980s ‘ monetary targeting with feedback’ in early 1990s

Growing market orientation of monetary policy
From direct to more indirect and market-based monetary policy measures
Initially CRR and SLR requirements locked away nearly 70 per cent of bank deposits
The SLR was brought down from 38.5 per cent of in early 1992 to 25 per cent in mid -1994
CRR reduced to 5 per cent from 15 per cent after 1991.

Interest rate deregulation was initiated after 1990
All sector-specific interest rate prescriptions were abolished Banks were advised to announce a benchmark PLR The ceiling on rates on deposits were removed The minimum rate prescription withdrawn. Bank free to charge PLR 1990 1994 1995-1997 2003

Third quarter review of Monetary policy 2006
GDP was raised from 8%
Two stage hike in CRR
Further hike in repo rate due to increased cash flows
LAF
Increase in reserves
Increase in net foreign assets
Inflation was largely due to primary sector
Oil prices stabilized in towards the end of financial year
20 % Money supply growth 5- 5.55% Inflation 5.5% CRR 6% Reverse repo rate 7.5% Repo rate 8.5- 9% GDP

Impact on Economy
Inflation :
25 bps hike in REPO rate by RBI to limit the Inflation to 5-5.5 %
Interest Rate :
Hike in REPO rate signals hike in interest rates, a 10 year govt sec would expected to lie in the range of 7-8 % at the end of fiscal year .
Exchange Rate :
Hike in REPO rate is not expected to impact the exchange rate directly

Impact on Financial Services
Increase in term deposits
Increase in industrial credit as well as overall credit
Increase in provisioning requirements for standard assets of banks
Reduction in interest rate ceilings on NR(E)RA and FCNR(B) deposits

MONETARY POLICY FOR 2007-08
Decline in GDP growth projection.
No change in major rates.
Basic objective is price stability
Growth has been given a chance
Expected future hike in C.R.R
Housing loans
Liberalization of FOREX
4.5-5 % Inflation 8.5% GDP 17-17.5% M3 expansion 6.5 C.R.R 7.75% Repo rate 6% Reverse Repo rate 6% Bank rate

“ The whole thing is that ke bhaiya sabse bada rupaiya”
Increase limits from $1M to $10M for consultancy for infrastructure projects
Limit for Portfolio Investment Abroad enhanced from 25% to 35% of networth
Remittance limit up from $50000 to $100000 per year for individuals
Overseas investment limit for Indian JV’s enhanced from 200 to 300% of net worth
Prepayment of ECB’s up from $300 million to $400 million
Int rate ceiling on NRE deposit reduced 50 bps to LIBOR/SWAP
Ceiling on overseas investment for mutual funds increased from $3 to $4 billion
Int rate ceiling on FCNR deposit reduced 50 bps to LIBOR – 75 bps

Thank You

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India Monetary Policy

by Sam Ahuja on Apr 29, 2007

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