INDIA’S MONETARY POLICY

8/4/2019 INDIAS MONETARY POLICY

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INDIAS MONETARY POLICYAND ITS IMPACT ON INDIANECONOMY


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CURRENT MONETARYPOLICY:

As per the monetary policy review : March 2011On the basis of the macroeconomic assessment , there hasbeen an: Increase the repo rate under the liquidity adjustment

facility facility (LAF) by 25 basis points from 6.5 per cent to6.75 per cent with immediate effect; and

increase the reverse repo rate under the LAF by 25 basispoints from 5.5 per cent to 5.75 per cent with immediateeffect.

The bank rate has been retained at 6.00 percent. The cash reserve ratio of scheduled banks has been

retained at 6 per cent

The statutory liquidity ratio stands at 24 per cent


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CURRENT NEWS:

2011-03-21, ECONOMIC TIMESTight money policy to moderate growth in 2011

20 MAR, 2011, 05.23PM IST, SHUBHAGANESH,ET BUREAU

Growth prospects good for India in 2011


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18 MAR, 2011, 09.52AM IST,TNNHome, auto loans set to get costlier as RBI

hikes key rates


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TRENDS IN REPO RATE:

Year Repo Rate

2000

11.62%

2001 8.75%

2002 7.75%

2003 7.05%

2004 6%

2005 6.25%

2006 6.88%

2007 7.63%

2008 7.92%

2009 5.08%

2010 5.25%

2011 5.25%


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TRENDS IN CASH RESERVERATIO:

0 2 4 6 8 10 12

0

2

4

6

8

10

12

CRR Year CRR 2000 8.31%

2001 7.00%

2002 4.88%

2003 4.50%

2004 5.00%

2005 5.13%

2006 6.36%

2007 7.58%

2008 5.00%2009 5.00%

2010 5.75%

2011 6.00%


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TRENDS IN STATUTORY

LIQUIDITY RATIO:

0 2 4 6 8 10 12

0

2

4

6

8

10

12

SLRYear SLR

2000 25.00%

2001 25.00%

2002 25.00%

2003 25.00%

2004 25.00%

2005 25.00%

2006 25.00%

2007 25.00%

2008 24.00%

2009 25.00%

2010 24.00%

2011 24.00%


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Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 9.30

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.47

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

INFLATION RATES:


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INFLATION RATE

CHANGES:


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YearInflation rate (consumer

prices)Rank Percent Change Date of Information

2003 5.40 % 64 2002 est.

2004 3.80 % 92 -29.63 % 2003 est.

2005 4.20 % 134 10.53 % 2004 est.

2006 4.20 % 125 0.00 % 2005 est.

2007 5.30 % 139 26.19 % 2006 est.

2008 6.40 % 148 20.75 % 2007 est.

2009 8.30 % 130 29.69 % 2008 est.

2010 10.90 % 197 31.33 % 2009 est.

2011 11.70 % 201 7.34 % 2010 est.

Inflation rate (consumer prices):11.7% (2010est.)

10.9% (2009 est.)


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RESERVE BANK OF INDIA:

It is the RBI that lays down the monetary policy.

It was inaugurated in April 1935 with a share capital ofRs. 5Cr.

The government of India held Rs. 2,22,000.

It was nationalized in 1949.


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FUNCTIONS OF RBI:

Bank of Issue Banker to government Bankers bank and lender of the last

resort Controller of credit Custodian of foreign exchange

reserves Supervisory functions Promotional roles


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Monetary policyis a regulation of a central bankor any regulatory authority, that ascertains the sizeand growth rate of the money supply. Monetarypolicy directly influence the interest rates which inturn has a negative relation with the price level.

In the face of inflation the central bank of thecountry generally resorts to a rise in the cashreserve ratio, repo rate and reverse repo rate. Sothe basic idea is to reduce the money supply in theeconomy.


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To this end government securities are alsoissued so as to mop up the excess moneysupply from the mass. This would reduceaggregate demand . This reduction would againhelp reduce the price level.

Monetary policy is adopted with an objective tomake the most of production and employmentand consequently stabilize the price level of acountry.

Monetary policy also regulates the interest rate,availability of credit and at the same time

promotes the overall economic growth of acountry. Monetary policy facilitates establishingtrade relationships with other countries.


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The monetary policy since 1952 emphasised ontwo main aims

i) speed up economic development in thecountry to raise national income and standard ofliving.

ii) to control and reduce inflationary pressure in

the economy.Major weapons of monetary policy:

i) Credit Controla) General Credit Controlsb) Selective & Direct Credit Controls


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Since 1955-56 and after 1973-74 theinflationary rise in prices have been steadily

mounting.Shortfalls in production and hoarding andspeculation in essential commodities havecontributed to this inflationary pressure.Its major weapons are as follows.

General Credit Controls


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It also referred to as the discount rate, isthe rate of interest which a centralbank charges on the loans and advances

that it extends to commercial banks andother financial intermediaries.Initially it stood at 3%Was changed for the first time in November

1953 to 3.5%.

Bank Rate


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It rose to 10% in July 1981 and remained

constant for another 10 yrs (1981-91)


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The structure of interest rates isadministered by RBI- they are notautomatically linked to the bank rate.The commercial banks enjoy specificrefinance facilities and not necessarilyrediscount their eligible securities withRBI at bank rate.

The bill market is under developed andthe different sub markets of the moneymarket are not influenced by it

Why is role of Bank Rate limited in India?


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The CRR refers to the liquid cash thatbanks have to maintain with the ReserveBank of India (RBI) as a certainpercentage of their demand and timeliabilities.

Initially it was 5% against the demand

deposits and 2% against time deposits.

Cash Reserve Ratio (CRR)


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Since 1962 RBI was empowered to vary thecash reserve requirement between 3% & 15%

of the total demand and time deposits.

It rose from 3 to 7% in September 1973.


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SLR is the amount of liquid assets, suchas cash, precious metals or otherapproved securities, that a financialinstitution must maintain as reservesother than the Cash with the CentralBank.All banks had to maintain their SLR at

25% of the total demand and time depositliabilities.

Statutory Liquidity Ratio (SLR)


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Objectives of SLR are:

To restrict the expansion of bank credit.

To augment the investment of the banksin Government securities.

To ensure solvency of banks. A reductionof SLR rates looks eminent to support the

credit growth in India.


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It is the means of implementing monetary

policy by which a central bank controls theshort term interest rate and the supply of basemoney in an economy, and thus indirectly thetotal money supply.This involves meeting the demand of basemoney at the target rate by buying and sellinggovernment securities, or other financial

instruments.Monetary targets such as inflation, interestrates or exchange rates are used to guide thisimplementation.

Open Market Operations


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The RBI uses three kinds of selectivecredit controls:

Minimum margins for lending against

specific securities.Ceiling on the amounts of credit forcertain purposes.Discriminatory rate of interest charged oncertain type of advances

Selective & Direct Credit Controls


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CREDIT AUTHORISATION SCHEME:

Under this scheme the , the commercial banks had

to obtain RBIs authorization before sanctioning anyfresh credit of Rs. 1 Crore or more to any singleparty.This was later raised to 6 crores in April 1986.The cut off point for all the manufacturing units andthe exporters was raised to Rs. 7 CroresCAS was further liberalised in july 1987 to allow forgreater access to credit to meet the genuine

demands in production sectors without the priorsanction of RBIOne of the major step taken by RBI was to abolishCAS in october 1988


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CREDIT MONITORING ARRANGEMENT:

RBI monitored and scrutinised allsanctions of bank loans through CMAexceeding

(i) Rs. 5 crore to any single party forworking capital requirement(ii) Rs. 2 crores in the case of term

loansOver 930 parties are under CMA.


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INFLATION:

It may be defined as an increase in the general level ofprices for goods and services. As a consequence ,thepurchasing power of money will fall.

Most of the countries in the world try to sustain an inflationrate between 2 and 3 percent.

Inflation lowers the rate of savings and diminishes thepurchasing power.

Inflation takes place, when too much money is incirculation in comparison with the production of goods andservices.


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MEASUREMENT OF INFLATION:

Inflation is evaluated by changes in the CPI(Consumer Price Index). It is essential toknow the changes of absolute price andrelative price, at the time of determining the

inflation rate.

The GNP (Gross National Product) is also

considered while evaluating the inflation of acountry.


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CAUSES OF INFLATION:

The main cause behind inflation is the increase ofmoney supplythan the demand for money.

Alternatively, it can be said that when the supplyof money per unit of output increases, inflation

occurs.

The supply of money per unit of output increases,when "velocity" of money circulation increases.

The demand for money depends on the overalleconomic activities of a country.


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MONETARY POLICY AND INFLATION:

They are closely related concepts wherein the monetarypolicy can be used efficiently to reduce the effect of theinflation.

Inflation is thought of as the rise in prices and wages that

reduces the purchasing power of money.

Monetary policy is the regulation adopted by the centralbank, currency board or other regulatory authority whichstabilizes the prices and maximizes production and

employment of the country.


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EFFECTS OF MONETORY POLICY


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Control inflation

Interest rate

Business cycle

Spending

Employment

Effect of monetary policy


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RAISE REPO, REVERSE REPO RATES BY25 BASIS POINTS EACHMost analysts and market participants expect the RBI to raise

rates by 25 basis points, continuing with its stance of gradualpolicy tightening.A quarter percentage point rate hike would signal the centralbank's discomfort over inflation as well as its intention not to hurtgrowth momentum. With that outcome already factored in by

markets, the accompanying statement will be closely watched bybond and money market investors.Many dealers expect a dovish statement from RBI Governor D.Subbarao given that inflation is easing and certain downsiderisks to growth are also emerging

PROBABILITY: MOST LIKELY


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Bankers fear that after raising lending rates by nearly 150basis points since July, further rate hikes may slow creditgrowth and interrupt momentum in the economic recovery.

A handful of market participants expect the RBI to pause nextweek, with inflation easing and downside risks to growthescalating following a spate of corruption scandals, politicaluncertainty ahead of five state elections this year, and apullout of foreign funds from Indian equities.

Such expectations have been reflected in bond and swaprates, which fell sharply this week. Swap rates touched a two-month low on Thursday after reaching a 28-month peak inearly February, when inflation worries were at the fore.Also, bankers fear that after raising lending rates by nearly

150 basis points since July, further rate hikes may slow creditgrowth and interrupt momentum in the economic recoveryPROBABILITY: LESS LIKELY


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REPO, REVERSE REPO RATES RAISED50 BASIS POINTS EACH

Very few analysts expect the central bank toact so aggressively. But, the RBI might

justify the move if it expects inflation to

remain above its projected 7 percent levelfor March end and longer and is confidentabout robust growth momentum.

PROBABILITY: LEAST LIKELY


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www.wikipedia.comwww.rbi.org.inwww.reuters.com

Indian economy by Ruddar Dutt &K.P.M.Sundharamwww.moneycontrol.comwww.ndtv.com

REFRENCES
http://www.wikipedia.com/http://www.rbi.org.in/http://www.reuters.com/http://www.moneycontrol.com/http://www.ndtv.com/http://www.ndtv.com/http://www.moneycontrol.com/http://www.reuters.com/http://www.rbi.org.in/http://www.wikipedia.com/

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INDIA’S MONETARY POLICY