The document discusses India's monetary policy and the tension between controlling inflation and promoting economic growth. It provides an overview of monetary policy tools used by the Reserve Bank of India such as interest rates, reserve requirements, open market operations, and credit controls. The monetary policy aims to balance objectives of price stability, growth, and employment while maintaining financial stability. Recently the RBI lowered its repo rate by 0.25% to 6.5% to boost growth, while keeping inflation under control. However, the central government often pushes for lower interest rates to increase growth, creating tensions with RBI's inflation-targeting approach.

1. Monetary Policy of India
Tug of War between Inflation
Control and Growth
 By : Abhisek Khatua

2. What is Monetary Policy ?
 Important Tool of Economic Policy
 Central Bank’s Policy pertaining to the control
of the availability, cost, and use of money and
credit with help of monetary measures in order
to achieve specific goal (economic policy)
 “The attitude of the political authority towards
the monetary system of the community under
its control” ……..Paul Einzig
Monetary
Policy
Currency
Deposits
Credit
Foreign
Exchanges

3. Indian Monetary Policy
Active Policy
Controlled Money Supply
Seasonal Variations
Flexible
Investment & Saving Oriented
Wide Range of Methods of Credit Control
Neutrality of Money
Exchange Rate Stability
Economic Growth
Price Stabilization
Full Employment
BOP Equilibrium
Equal Income Distribution
Features Objectives

4. Instruments of Monetary Policy
Bank Rate
Open Market Operations
Variations in the reverse requirements
Repo Rate
Liquidity Adjustment Facility
Rationing of Credit
Margin Requirement
Variable Interest Rate
Regulation of Consumer Credit
Licensing
Quantitative Qualitative

5. Tug of War Begins

6. Monetary Policy Approach
Tight Monetary Policy
• Govt. sells Securities (OMO)
• CRR, Repo Rate, Bank Rates
Monetary Supply
Interest Rates
Investment Expenditures
Aggregate Demand
Price Level
Expansionary Monetary Policy
• Govt. buys Securities (OMO)
• CRR, Repo Rate, Bank Rates
Monetary Supply
Interest Rates
Investment Expenditures
Aggregate Demand
Aggregate Output
@Source: RBI Reports

7. Bank Rate : It’s Impact
Central Bank
Commercial /Domestic Bank
Consumer / Customers
Loans & Advances
Loans & Advances
* Decrease Money Supply
in Economy
* Inflation Control
* Economic Growth Suffers
* Increase in Money
Supply
* Economic Growth
Targeted
* Inflation Control Suffers

8. Bank Rate Trends

9. Repo Rate
Central Bank
Commercial Banks
Lends Money in the
event of shortfall of funds
Repo Rate Trends
@Source: RBI Annual Report, 2010

10. Repo Rate and It’s Impact
Repo Rate Increases
Disincentive for Banks to
Borrow money from RBI
Reduces Money Supply
Reduces Inflation
Repo Rate Decreases
Increases Money Supply
Growth Targeted
Trade Off

11. Reverse Repo Rate and It’s Impact
Reverse Repo Rate Increases
Incentive for Banks
Reduces Money Supply
Reduces Inflation
Reverse Repo Rate Decreases
Disincentive for Banks
Increases Money Supply in the
economy
Growth Targeted
Trade Off
Central Bank Commercial Banks
Parks Excess Money

12. Reverse Repo Rate Trends:

13. Cash Reserve Ratio
Commercial Banks
***Specified Minimum fraction of
Total Deposits of customer
***Hold as Reserve either in Cash
or Deposits
Central
Bank

14. Cash Reserve Ratio and It’s Impact
• Higher Cost for Banks
• Higher Cost for Borrowers
• Money Supply Reduces
• Inflation Control
CRR
• Cost Consideration taken cared
• Money Supply Increases
• Growth TargetedCRR

15. Repo Rate, CRR and MSF Trends

16. Cash Reserve Ratio Trends

17. Statutory Liquidity Ratio
Commercial Bank
(need to maintain)
Stipulated Proportion
of Net Demand and
Time Liabilities in the
form of Liquid
Report to Central
Bank

18. Statutory Liquidity Ratio and It’s Impact
Money Supply
Increases
Growth Targeted
Money Supply
Reduces
Inflation Control

19. Monetary Policy & Its Aspects
• Used as an effective tool
to target economic
growth.
• Used mainly to control
money supply
Monetary
Policy Tools
• Determines the total
amount of currency
floating in the economy.
• Is considered as a major
factor for inflation and
Growth
Money
supply • Rise/fall in general price
level
• Affects the economic
growth of the country
Inflation &
Growth

20. Impact of Monetary Policy
Country’s Growth
Inflation
Value of its Currency
Level of Employment
Investment Prospects
Directly
Indirectly

21. Philips Curve : Inflation and Unemployment

22. Historical Perspective of Growth, Inflation and Money Supply
@Source: RBI Perspectives on Inflation in India
(Speech by Shri Deepak Mohanty, Executive Director, Reserve Bank of India, delivered at the Bankers Club, Chennai on September 28, 2010

23. Monetary Policy Framework & Approach of RBI
Instruments
• Reserve
Requirements
• Official
Interest Rates
• Open Market
Operations
• Direct
Controls
Operating
Targets
• Short Term
Interest Rates
• Reserve
Aggregates
Intermediate
Targets
• Monetary
Aggregates
• Inflation
• Exchange
Rate
Goals
• Price Stability
• Sustainable
Growth
• High
Employment
• Financial
Stability
Tactics Strategy

24. Recent Approach
 Expectation of Rate cut by .25 to .50 % in interest rate to boost industrial growth and
economy.
 FM Mr. Arun Jaitley: “Need to make our economy more competitive with more competitive
interest rates.”
 Bankers and Experts: expecting Lowering the Borrowing rate
 Bank of Maharastra CMD Mr. Sushil Muhnot: There is a possibility of RBI reducing rate by .50 %
as inflation has been eased.
 Industry Chamber: Expects .50 % rate cut (Assocham)
 RBI Governor Mr. Raghuram Rajan: (last month): Govt. sticking to fiscal consolidation road
map in Budget comforting, it is a statement showing hope of rate cut.
 In 2015 RBI has lowered rates by 1.25 %

25. Highlights of RBI’s First Bi-Monthly Monetary
Policy Statement(5th April, 2016):
• Money Supply Increase, Growth TargetedRepo Rate Cut by .25% to 6.50%
• Money Supply Increase, Growth TargetedReverse Repo Rate hiked by .25% to 6%
• Stable ImpactCRR unchanged at 4%
• More Money Supply (Bank gets urgent credit at lower cost)MSF rate cut by .75%
• Growth Targeted Monetary Policy (Expansionary)Growth Forecast 7.6%
• Controlled Inflation, but likely to increaseExpects Inflation around 5%
• Upward Pressure of Inflation of 1.5%7th Pay Commission Impact
@Source: economictimes.com

26. Our Interpretation
 RBI: Likes to see Inflation under control - therefore does not cut interest rates when inflation
is high.
 Central Govt.: Bends more in favour of higher economic growth - likes to see cut in interest
rates  cost of capital goes down  economic activities picks up helping economic
growth.
 FM Arun Jaitley openly cited: high cost of capital is "one singular factor" slowing down
growth of the manufacturing sector. Also quoted that RBI is a highly professional body to
manage it in a better way
 Rajan on other hand said: "Monetary stimulus will not do, The govt. needs to work on
infrastructure"
 Recent Monetary Policy is "Welcome Decisions" as there is expected Rate cut by RBI.

27. Conclusion
 MP is management of expectation.
 "India’s growth story at least in the short run depends critically on inflation. There is a felt
need that, if to bring down inflation, growth in the short run needs to be compromised then
we should do that. It is important therefore to bring down inflation as quickly as possible
and with as little damage to the growth and employment story as possible.“
[@Kausik Basu Chief Economic Adviser, Govt. India: The Rise of Indian Economy: Fiscal, Monetary and Other Policy challenges ,Journal of the Italian Economic Association] 2012]

28. References
 www.investopedia.com
 www.rediff.com/business
 www.rbi.com
 www.economictimes.com
 www.wikipedia.com
 www.tradingeconomics.com
 www.statisticstimes.com

29. Thank You