IN NEXT REVIEW?
BHAGIRATH M P
Changes in monetary stance (last 10-year period)
Phase I of 5 years of 2003-08 of high growth but rising inflation concern
towards the later part of the period when repo rate was raised from 6 per cent
to 9 per cent and the cash reserve ratio (CRR) was raised from 4.5 per cent to 9
Phase II of 2 years of 2008-10 following the global financial crisis when
the repo rate was reduced from 9 per cent to 5.25 per cent and CRR was
reduced from 9 per cent to 5.75 per cent.
Phase III of 2 years of 2010-12 of monetary tightening responding to
rising inflation when policy rate was raised from 5.25 per cent to 8.5 per cent
but CRR was reduced to 5.5 per cent.
Phase IV of over a year of monetary easing in 2012-13 and 2013-14 so far
with the repo rate reduced to 7.25 per cent and CRR lowered to 4.0 per cent;
though since mid-July 2013, the RBI has tightened the monetary and liquidity
conditions without changing the policy repo rate and CRR to address exchange
Tools of Monetary Policy
Bank rate: Rate at which RBI allows finance to commercial banks
CRR: Maintaining a daily cash reserve equivalent with RBI. Used to impound excess
liquidity or release funds into the economy
SLR: Minimum portion of Net Demand and time liabilities in form of cash, gold, etc. as
liquid assets, in addition to cash reserve requirements
Repo/ Reverse-Repo rate:
Repo rate is the rate at which the RBI lends money to commercial banks in the event of
any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Reverse repo rate is the rate at which theRBI borrows money from commercial banks
within the country. It is a monetary policy instrument which can be used to control the
money supply in the country.
Open market operations : Involves buying and selling of govt. securities by RBI to
influence volumes of cash reserves .
Used by central bank to stimulate the economy when standard economic policy has
How is it done?
Buying financial assets (eg. bonds) from commercial banks via open market
Flood them with reserves (cash in the vault) in hopes that they will lend it out and
start a virtuous cycle of investment and consumption.
Aimed at: Price levels (Inflation),Liquidity conditions(Policy rates reduced), CAD (less
Cut in CRR, Repo rate, MSF
Policy rate measures’ Lag time:
Inflation: 3-4 quarters
Growth : 2-3 quarters
Monetary Tightening: In order to control or reduce the inflation in a country,
the central bank may use some monetary policies. This is called Monetary
Reserve Bank of India often does this by increasing interest rates which might
result into decrease in Liquidity.
When the Liquidity decreases and the demand for money decreases which
might result in lower inflation
However this is not the case in present scenario
GDP in India
GDP growth numbers
2004-05 to 2010-11
Global financial crises
Euro crises, slump in world economy
Domestic policy constraints, manufacturing & services
CAD, Currency, sentiment
Per Capita GDP in India is around $1,491 in 2012; 141th position amongst all countries
RBI is raising interest rates
Oct : 7.75
July : 7.25
Nov : Expected to go up
In spite of two consecutive raises in interest rates the inflation is at a 10
month high at 7%
Inflation is currently driven by exogenous factors
Driven mostly due to fuel prices and increased demand
Falling rupee compounding the problem
WPI food inflation at 18.19%
20% avg hike in rural wages
Result of tightening policy
GDP forecast further revised to 4.8%