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- 1. Monetary Policy Group 5 Kapali 05 Prachi 16 Pankaj 21 Nikhil 28 Kedar 40 On Ali 52 Chandra 56
- 2. Macroeconomic Policies Fiscal Policy Physical Policy Related to Related to overcoming budget, government specific problems of the expenditure, taxation economy Monetary Policy Related to money supply, exchange rate control and bank rate control
- 3. Fiscal Policy Use of “Government Expenditure”, and “taxation” to manage the economy. Purpose of Fiscal Policy Stabilise economic growth, avoiding the boom and bust economic cycle Variables affected by Fiscal Policy in the economy Aggregate demand and the level of economic activity The pattern of resource allocation The distribution of income.
- 4. Physical Policy Meant to affect only strategic points of the economy Purpose of Physical Policy Overcome specific problems such as pricing of particular commodity, shortages or surpluses developing in the economy etc. Variables affected by Physical Policy in the economy Price and distribution of specific commodity Investment and production Foreign Trade
- 5. Monetary Policy Regulation of supply of Money and Cost and Availability of Credit in the economy Purpose of Monetary Policy Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth Variables affected by Monetary Policy in the economy Interest Rates Liquidity Credit Availability Exchange Rates
- 6. Monetary Policy – RBI’s role Demand for Money Demand for goods/services Ensuring price Instruments such as CRR, stability and ensuring OMO & Bank Rate savings Control on money Control on bank supply, velocity of credit when prices circulation of money rise/fall during inflation
- 7. Monetary Policy – Terminology Inflation • Inflation refers to a persistent rise in prices Money Supply (M3) • Total volume of money circulating in the economy • Minimum rate at which the central bank provides loans to commercial Bank Rate banks • Amount of money that banks must set aside with RBI against their Cash Reserve Ratio (CRR) deposits • Percentage of bank funds to be maintained in government and Statutory Liquidity Ratio (SLR) approved securities Repo Rate • Rate at which RBI lends to other banks against government securities Reverse Repo Rate • Rate at which RBI borrows from other banks Capital Adequacy Ratio (CAR) • Capacity of bank meeting the time liabilities and other risk Open Market Operations (OMO) • Purchase and sale of securities in the open market
- 8. Current Rates Inflation • 0.27 (New low in 30 years) Bank Rate • 6.0% CRR • 5.0 SLR • 24.0% Repo Rate • 5.0% Reverse Repo Rate • 3.5% PLR • 12.75% – 13.25% Re/$ • 50.95
- 9. Monetary Policy – Influence Target Variables Policy Variables -Inflation -Interest rate - Money supply -Real GDP - OMO: Liquidity conditions -Employment - policy rates (CRR, repo etc.) -Consumption -Savings -Investment
- 10. CRR Movement Before 1991 Result • Government raised funds below • Complex, distorted interest rate market rate structure • No depth in Government Securities • Adversely affected viability and Market profitability of banks • Regulation of deposit rates • Transparency and norms could not be • Under developed financial followed strictly markets, Less financial instruments availability
- 11. CRR Movement Boost Economy after Rise in CRR to control liquidity, 2001 Slowdown / due to Heavy Capital Inflow & dotcom bubble to curb Re Appreciation CRR Cuts to boost Stable CRR from CRR hikes to economy after 2004 to 2006 curb inflation Sub prime loss / Global meltdown
- 12. Inflation Movement CRR hikes proved to Uncontrolled Inflation despite Inflation Down on account Be effective Further CRR hikes of global credit crunch To curb Inflation http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
- 13. SLR Movement Banks to made available more funds Stable SLR from & More Efficiency 1998 onwards
- 14. Repo and Reverse Repo rates Movement Repo rate reduction due to make credit available at cheaper rates Increased rates to control the liquidity
- 15. Exchange Rate Movement Sterilization to LAF - To Control Exchange Ratio Control rupee – Outflow of $ from India Market Appreciation
- 16. Forex Reserves Position The Surge in Foreign Exchange Reserves Sterilization / Selling bonds & Buying dollars www.rgemonitor.com/blog/economonitor/248231
- 17. Sterilization under MSS Sterilization bonds under (MSS) - April 2004 Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007 www.rgemonitor.com/blog/economonitor/248231
- 18. 18 Current Global Scenario Global GDP -0.6% World trade Tighter credit contraction by 2.8% Recession Estimated PPP Global Growth 0.5% Production Plunge Demand Slump Job losses Aggressive and unconventional measures taken by Governments and central banks
- 19. Impact on India Money and credit market Domestic Banks Local Institutions Domestic MFs NBFC Re $ Financial Channel
- 20. 20 Challenges for RBI Growth amid Global economic slowdown
- 21. 21 Limitations – Monetary Policy Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation Monetary policy is restricted by the impact of other government actions, especially Fiscal policy, i.e. decisions about government expenditures and taxation Problems of an inflexible labour market, inadequate infrastructure and, most important, fiscal policy whose discipline is open to question limits the effectiveness of the Monetary policy Monetary Policy cannot work in isolation!!
- 22. Thank You
Notes de l'éditeur
- Bank Rateminimum rate at which the central bank provides loans to commercial banksAlso called the discount rate. An increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate alter the cost of creditCurrent Bank rate 6%Cash Reserve Ratio Certain amount of banks deposits in cash with RBI. This % is cash reserve ratioThe current CRR requirement is 5 per cent. Statutory Liquidity RatioBanks to maintain 24 per cent of their demand and time liabilities in government securities and certain approved securities called SLR securitiesBuying/Selling of securities laid to Harshad Mehta scam(1992)Reposecured short-term (usually 15 days) loan by one bank to another against government securities. The borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.Current Repo Rate is 5%Reverse Reposame repurchase agreement(as Repo) from the buyer's viewpoint seller executing the transaction would describe it as a 'repo', while the buyer would describe it a 'reverse repo‘Current Reverse Repo rate is 3.5%CAR (Capital adequacy Ratio ):ratio of a bank's capital to its riskNational regulators track a bank's CAR to ensure banks can bear reasonable amount of loss and are complying with statutory Capital requirementscapacity of bank meeting the time liabilities and other risk Risk could be credit risk, operational risk, etcBank's capital is the "cushion" for potential losses, which protect the bank's depositors or other lendersBanking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking systemCAR is similar to leverageOpen Market Operationsimportant instrument of credit controlRBI purchases/sells securities in open market operations. During inflation, RBI sells securities to remove excess money in the market.During Deflation ,RBI purchases securitiesMoney Supply (M3)total volume of money circulating in the economycurrency with the public and demand deposits (current account + savings account) with the public. four concepts of measuring money supply:M1= currency with the public + demand deposits with the public + other deposits with the public. All coins and notes in circulation, and personal current accounts. M2= M1+ personal deposit accounts + government deposits + deposits in currencies other than rupee. M3= fixed deposits + savings deposits with post office + saving banks + M1Most Popular and known as Broad money conceptInflationInflation refers to a persistent rise in pricesToo much money and too few goodsScarcity of goods and many buyers, push the prices up Deflation is Converse of inflation persistent falling of prices. RBI can take two steps to reduce InflationReduce supply of money Increase interest rates
- Bank Rateminimum rate at which the central bank provides loans to commercial banksAlso called the discount rate. An increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate alter the cost of creditCurrent Bank rate 6%Cash Reserve Ratio Certain amount of banks deposits in cash with RBI. This % is cash reserve ratioThe current CRR requirement is 5 per cent. Statutory Liquidity RatioBanks to maintain 24 per cent of their demand and time liabilities in government securities and certain approved securities called SLR securitiesBuying/Selling of securities laid to Harshad Mehta scam(1992)Reposecured short-term (usually 15 days) loan by one bank to another against government securities. The borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.Current Repo Rate is 5%Reverse Reposame repurchase agreement(as Repo) from the buyer's viewpoint seller executing the transaction would describe it as a 'repo', while the buyer would describe it a 'reverse repo‘Current Reverse Repo rate is 3.5%CAR (Capital adequacy Ratio ):ratio of a bank's capital to its riskNational regulators track a bank's CAR to ensure banks can bear reasonable amount of loss and are complying with statutory Capital requirementscapacity of bank meeting the time liabilities and other risk Risk could be credit risk, operational risk, etcBank's capital is the "cushion" for potential losses, which protect the bank's depositors or other lendersBanking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking systemCAR is similar to leverageOpen Market Operationsimportant instrument of credit controlRBI purchases/sells securities in open market operations. During inflation, RBI sells securities to remove excess money in the market.During Deflation ,RBI purchases securitiesMoney Supply (M3)total volume of money circulating in the economycurrency with the public and demand deposits (current account + savings account) with the public. four concepts of measuring money supply:M1= currency with the public + demand deposits with the public + other deposits with the public. All coins and notes in circulation, and personal current accounts. M2= M1+ personal deposit accounts + government deposits + deposits in currencies other than rupee. M3= fixed deposits + savings deposits with post office + saving banks + M1Most Popular and known as Broad money conceptInflationInflation refers to a persistent rise in pricesToo much money and too few goodsScarcity of goods and many buyers, push the prices up Deflation is Converse of inflation persistent falling of prices. RBI can take two steps to reduce InflationReduce supply of money Increase interest rates
- Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. * Now the policy is reviewed every 15 days
- Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. * Now the policy is reviewed every 15 days
- CRR Cuts to curb high Inflation ratesRBI Monetary Policy: Cuts / Hikes in CRR, A change in 100 basis points change the money supply by 40,000Cr rupees.Govt. Fiscal Policy – Cut duties (Excise & Custom), Put Export Duties to discourage export of steel and cement, Increase Subsidy on Imported Oil, Promote Import to chase Domestic demand and curb cartals esp. in Cement and Steel sectors, Ban on Commodity Future TradingsDecoupling theory concepts – Red Peak end.
- CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. Although the bonds are long-term in nature, they are liquid as they can be traded in the secondary market.Since 1991, as the economy has recovered and sector reforms increased, the CRR has fallen from 15 per cent in March 1991 to 5.5 per cent in December 2001. The SLR has fallen from 38.5 per cent to 25 per cent over the past decade.
- Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy. * Now the policy is reviewed every 15 days
- Re Appreciation: Monetary: Reduction in Govt. Sterilization to control Capital Inflow – Fiscal measures: Reduction in duties for Export oriented units GOI reduction in trade deficit due to cheaper import of OilRe Depreciation: Initial Ex Ante Real Devaluation•Switch to a market determined exchange rate regime since 1993 •Focus on management of volatility without fixed rate target. •Underlying demand and supply conditions determine the exchange rate movements in an orderly way RBI still planning to issure 2.5 K crore bonds in the coming 6 months..Bonds prices have fallen. And yield has risen.
- The liberalization process started in the 1980s giving an impetus to exports and oil imports. This lead to trade and current account deficits which were mainly financed by high-cost short-term external commercial loans. Medium and long-term external commercial loans also roseIndia’s reserves are over and above the required reserves based on various criteria, esp. import cover and short-term debt (See Table). And these excess reserves have spiked in the last two years.To sterilize the liquidity impact of FX intervention, RBI started issuing sterilization bonds under the Market Stabilization Scheme (MSS) beginning April 2004. The cap on these bonds was raised from Rupees 700 bn in 2006 to Rupees 800 bn in early 2007 and later to Rupees 1500 bn in August 2007, Rupees 2000 bn in October 2007 and Rupees 2500 bn in November 2007. The interest payments on these bonds have to be borne by the Central Government, thus putting pressure on the already constrained fiscal finances. While the interest rate on these bonds has moved up, RBI earns low returns from the foreign currency assets held in dollar, Euro, pound and yen, esp. after accounting for valuation changes. The fiscal cost of holding excess reserves is calculated for various adequacy measures as the difference between the interest paid on the sterilization bonds and the interest earned by RBI on foreign currency assets (See Table).Since the introduction of the reform process in the early 1990s, India has witnessed a significantincrease in cross-border capital flows, a trend that represents a clear break from the previous twodecades. The size of net capital flows to India increased from US $ 7.1 billion in 1990-91 to US $ 45.8billion in 2006-07, and further to US $ 108.0 billion during 2007-08 (Chart 1). India has one of thehighest net capital flows among the emerging market economies (EMEs) of Asia.
- The liberalization process started in the 1980s giving an impetus to exports and oil imports. This lead to trade and current account deficits which were mainly financed by high-cost short-term external commercial loans. Medium and long-term external commercial loans also roseIndia’s reserves are over and above the required reserves based on various criteria, esp. import cover and short-term debt (See Table). And these excess reserves have spiked in the last two years.To sterilize the liquidity impact of FX intervention, RBI started issuing sterilization bonds under the Market Stabilization Scheme (MSS) beginning April 2004. The cap on these bonds was raised from Rupees 700 bn in 2006 to Rupees 800 bn in early 2007 and later to Rupees 1500 bn in August 2007, Rupees 2000 bn in October 2007 and Rupees 2500 bn in November 2007. The interest payments on these bonds have to be borne by the Central Government, thus putting pressure on the already constrained fiscal finances. While the interest rate on these bonds has moved up, RBI earns low returns from the foreign currency assets held in dollar, Euro, pound and yen, esp. after accounting for valuation changes. The fiscal cost of holding excess reserves is calculated for various adequacy measures as the difference between the interest paid on the sterilization bonds and the interest earned by RBI on foreign currency assets (See Table).Since the introduction of the reform process in the early 1990s, India has witnessed a significantincrease in cross-border capital flows, a trend that represents a clear break from the previous twodecades. The size of net capital flows to India increased from US $ 7.1 billion in 1990-91 to US $ 45.8billion in 2006-07, and further to US $ 108.0 billion during 2007-08 (Chart 1). India has one of thehighest net capital flows among the emerging market economies (EMEs) of Asia.
- Manage the crisis through Monetary Policy only.Fiscal policy may have lesser impact owning to upcoming elections and political uncertaintyHuge outflow of dollars => More INR in the market => More Gilt securities, falling price => High yield => InterestDecreased purchasing power of people can cause deflationMaintain comfortable rupee liquidityAugment foreign exchange liquidityPolicy framework to keep credit delivery on track