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MONETARY POLICY

ByYogen Mehta 113Jackey Kothia 124Kruti Killawala 112Shabnam Kadwani 127Alan Rego 115

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Reserve Bank of India Introduction

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Reserve Bank of India Structure, Working

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The part of the economic policy which regulates the level ofmoney in the economy in order to regulate inflation, improvebalance of payments, increase gross national product etc.RBI, in case of India controls the monetary policy.

The policy statement traditionally announced thrice a yearthrough which RBI insures Price stability for the economy.

April-September - Slack Season Policy

October-March - Busy Season Policy

RBI reserves its right to alter monetary policy from time totime depending upon state of economy

Monetary Policy Meaning

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Maintain price stability

Flow of credit to the productive sector ofeconomy

Stability of national currency

Growth in employment & income

Achieving foreign exchange stability

Managing suitable level of investment andsavings

Regulating rate of interest & induce higher levelof investment

Achieving monetary equilibrium to ensureequality between demand & supply of money

Aims, ObjectivesMonetary Policy

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MONETARY

POLICY

QUALITATIVE

CONTROL

QUANTITATIVE

CONTROL

Types of ControlMonetary Policy

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Selective quality control

Rationing of credit.

Margin requirement

Variable interest rate

Regulation of consumer credit

Licensing to ensure proper regional coverage

They can be negative in character intended to discourageactivities which are regarded as inessential or undesirable.

Qualitative ToolsMonetary Policy

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BANK RATE

Banks use this rate to price their Long term loans to

individual and companies

This tool now not much in use and remains same

since years .

Tool - Bank RateMonetary Policy

BANK RATE LENDING RATE AGGREGATE MONEY EXPENDITURE INFLATION= = =

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CASH RESERVE RATIO

RBI has the power to vary this ratio and there by use it as aninstrument of Credit Control. Permissible limit is 3 to

15%(1962)

It is essential for a bank to maintain the ratio or otherwise it

may not be able to meet the withdrawal demand of all itsdepositors, and failure to do so may eventually result in failure

of the bank.

Tool Cash Reserve RatioMonetary Policy

CRR = EXCESS RESERVES FOR BANK LENDING = CREDIT

CRR =EXCESS RESERVES FOR BANK LENDING = CREDIT

ABSORB FOREIGN CAPITAL FLOW CURRENCY

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STATUTORY LIQUIDITY RATIO

Statutory Liquidity Ratio

Narsimham committee recommended to reduce it at

minimum level. According to that it is should be 25%rather than 40% this still remains unchanged.

Khan committee suggested abolishment of SLR.

The buying & selling of these securities laid thefoundation of the 1992 Harshad Mehta scam.

Tool Statutory Liquidity RatioMonetary Policy

l k

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Monetary Policy Tool Open Market Operations

Repo Rate

Whenever the banks have any shortage of funds they can borrow it from

RBI.

Repo rate is the rate at which our banks borrow rupees from RBI.

A reduction in the repo rate will help banks to get money at a cheaper

rate. When the repo rate increases borrowing from RBI becomes more

expensive.

Reverse Repo Rate

Reverse Repo rate is the rate at which RBI borrows money from banks.

Banks are always happy to lend money to RBI since their money are in safe

hands with a good interest.

An increase in Reverse repo rate can cause the banks to transfer more

funds to RBI due to this attractive interest rates.

It can cause the money to be drawn out of the banking system.

OPEN MARKET OPERATIONS

F Aff i P li

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Government agenda and development plans.

Recommendation of Narshimham committee,Taraporecommittee and Khan committee report.

Inflation and price situation.

Credit and liquidity condition.

Foreign money inflow (specially USD).

IMF and World bank.

Monetary Policy Factors Affecting Policy

E ilib i i t t tt i d

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Money demand

i Money supply

Increase in output => Increase in transactions => Increase in money

demand

Hike in CRR has lead to decrease in money supply leading to spike in interest rates

Equilibrium

Interest rate

New Equilibrium

Interest rate

Monetary Policy Equilibrium interest attained

E ilib i i t t ( ) tt i d

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Money demand

i Money supply

Increase in output => Increase in transactions => Increase in money

demand

Cut in CRR has lead to increase in money supply leading to cut in interest rates

EquilibriumInterest rate

New Equilibrium

Interest rate

Monetary Policy Equilibrium interest (r) attained

l A ti T k

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Monetary Policy Action Taken

RBIs Target

li Action Taken

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Monetary Policy Action Taken

Liquidity Sucked out

Rs.47,000 Crore est.

M P li Action Taken

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06

Apr

2007

20

Apr

2007

May June JulyAugu

st

Septe

mber

Octob

er

Nove

mber

Dece

mber

Janua

ry

Febru

ary

Marc

h

CRR 6.00 6.25 6.50 6.50 6.50 6.50 7.00 7.00 7.00 7.50 7.50 7.50 7.50

PLR 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.0 12.7

6.00

6.256.50 6.50 6.50 6.50

7.00 7.00 7.007.50 7.50 7.50 7.50

13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.2513.00

12.75

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

%

CRR and PLR 2007-2008

Monetary Policy Action Taken

M t P li Action Taken

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1500000.00

2000000.00

2500000.00

3000000.00

3500000.00

4000000.00

4500000.00

April

April

ay

ay

June

June

July

July

August

August

August

Septe

ber

Septe

ber

October

October

Nove

ber

Nove

ber

Dece

ber

Dece

ber

January

January

February

February

February

arch

arch

arch

Money Supply - M3 2007-2008

Monetary Policy Action Taken

M3 = Physical currency part of bank reserves, savings a/cs, short term and long term deposits, money/debt mutual funds.

M t P li Impact

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8.4 8.2

11.5

8.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2004-05 2005-06 2006-07 2007-08

IIP Growth Rate ( yoy, %) 2007-2008

Monetary Policy Impact

IIP number or IIP data (Index of Industrial Production) is a measurement

which represents the status of production in the industrial sector for a givenperiod of time compared to a reference period of time.

M t P li Action Taken

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Monetary Policy Action Taken

RBIs Target 5 %

Monetary Policy Action Taken

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April02

May

16

May

30

MayJune

04

July

11

July

25

July

Aug

ust

Sept

emb

er

10

Octo

ber

17

Octo

ber

07Nov

emb

er

14Nov

emb

er

Dec

emb

er

02

Janu

ary

23

Janu

ary

Febr

uary

Mar

ch

CRR 7.5 7.7 8.0 8.2 8.2 8.2 8.5 8.7 8.7 9.0 9.0 6.5 6.0 5.5 5.5 5.5 5.0 5.0 5.0

Repo 7.7 7.7 7.7 7.7 8.2 9.0 9.0 9.0 9.0 9.0 8.0 8.0 7.5 7.5 6.5 5.5 5.5 5.5 5.0

Rev Repo 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 5.0 4.0 4.0 4.0 3.5

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

CRR, Repo and Reverse Repo 2008-2009

Monetary Policy Action Taken

Lehman Bros Crisis

Liquidity Crunch

Liquidity Injected

Rs.1,60,000 Crore est.

Monetary Policy Action Taken

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April02

May

16

May

30

MayJune

04

July

11

July

25

July

Augu

st

Septe

mber

10

Octo

ber

17

Octo

ber

07

Nove

mber

14

Nove

mber

Dece

mber

02

Janua

ry

23

Janua

ry

Febru

ary

Marc

h

CRR 7.50 7.75 8.00 8.25 8.25 8.25 8.50 8.75 8.75 9.00 9.00 6.50 6.00 5.50 5.50 5.50 5.00 5.00 5.00

PLR 12.7 12.7 12.7 12.7 12.7 13.2 13.2 13.2 13.2 14.0 14.0 14.0 13.5 13.5 13.5 12.5 12.5 12.5 12.5

7.507.75

8.008.25 8.25 8.25

8.508.75 8.75

9.00 9.00

6.506.00

5.50 5.50 5.50

5.00 5.00 5.00

12.75 12.75 12.75 12.75 12.7513.25 13.25 13.25 13.25

14.00 14.00 14.0013.50 13.50 13.50

12.50 12.50 12.50 12.50

3.50

5.50

7.50

9.50

11.50

13.50

15.50

%

CRR and PLR 2008-2009

Monetary Policy Action Taken

Monetary Policy Action Taken

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3600000.00

3800000.00

4000000.00

4200000.00

4400000.00

4600000.00

4800000.00

5000000.00

Money Supply - M3 2008-2009

Monetary Policy Action Taken

M3 = Physical currency part of bank reserves, savings a/cs, short term and long term deposits, money/debt mutual funds.

Monetary Policy Impact

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8.2

11.5

8.5

2.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2005-06 2006-07 2007-08 2008-09

IIP Growth Rate ( yoy, %) 2008-2009

Monetary Policy Impact

IIP number or IIP data (Index of Industrial Production) is a measurement

which represents the status of production in the industrial sector for a givenperiod of time compared to a reference period of time.

Monetary Policy Action Taken

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Monetary Policy Action Taken

RBIs Target 6.5 %

Monetary Policy Action Taken

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April May June JulyAugu

st

Septe

mber

Octo

ber

Nove

mber

Dece

mber

Janua

ry

5Febr

uary

19Febr

uary

Marc

h

CRR 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50 5.75

Repo 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 5.00

Rev Repo 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

%

CRR, Repo and Reverse Repo 2009-2010

Monetary Policy Action Taken

Recovery

Liquidity sucked out

Rs.36,000 Crore est.

Monetary Policy Action Taken

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April May June JulyAugus

t

Septe

mber

Octob

er

Nove

mber

Dece

mber

Janua

ry

5

Febru

ary

19

Febru

ary

Marc

h

CRR 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50 5.75

PLR 12.2 12.2 12.2 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0

5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

5.505.75

12.25 12.25 12.2512.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00

3.50

4.50

5.50

6.50

7.50

8.50

9.50

10.50

11.50

12.50

13.50

%

CRR and PLR 2009-2010

Monetary Policy Action Taken

Monetary Policy Action Taken

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4400000.00

4600000.00

4800000.00

5000000.00

5200000.00

5400000.00

5600000.00

5800000.00

Money Supply - M3 2009-2010

Monetary Policy Action Taken

M3 = Physical currency part of bank reserves, savings a/cs, short term and long term deposits, money/debt mutual funds.

Monetary Policy Impact

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11.5

8.5

2.8

10.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2006-07 2007-08 2008-09 2009-10

IIP Growth Rate ( yoy, %) 2009-2010

Monetary Policy p

IIP number or IIP data (Index of Industrial Production) is a measurement

which represents the status of production in the industrial sector for a givenperiod of time compared to a reference period of time.

Monetary Policy Action Taken

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Monetary Policy

RBIs Target 7.5 %

Monetary Policy Action Taken

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02

April

30

AprilMay June July August

Septe

mber

Octobe

r

Novem

ber

Decem

ber

Januar

y

Februa

ry

CRR 5.75 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

Repo 5.25 5.25 5.25 5.25 5.62 5.62 6.00 6.00 6.25 6.25 6.50 6.50

Rev Repo 3.75 3.75 3.75 3.75 4.25 4.25 5.00 5.00 5.25 5.25 5.50 5.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

%

CRR, Repo and Reverse Repo 2010-2011

Monetary Policy

High Food inflation

IIP Slowing a tad

Monetary Policy Action Taken

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02

April

30

AprilMay June July August

Septe

mber

Octobe

r

Novem

ber

Decem

ber

Januar

y

Februa

ry

CRR 5.75 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

PLR 12.00 12.00 12.00 12.00 8.00 8.00 8.00 8.50 8.50 8.50 9.00 9.50

5.756.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

12.00 12.00 12.00 12.00

8.00 8.00 8.00

8.50 8.50 8.509.00

9.50

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

%

CRR and PLR 2010-2011

Monetary Policy

Monetary Policy Action Taken

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5200000.00

5400000.00

5600000.00

5800000.00

6000000.00

6200000.00

6400000.00

Money Supply - M3 2010-2011

o eta y o cy

M3 = Physical currency part of bank reserves, savings a/cs, short term and long term deposits, money/debt mutual funds.

Monetary Policy Impact

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8.5

2.8

10.5

8.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2007-08 2008-09 2009-10 2010-11

IIP Growth Rate ( yoy, %) 2010-2011

y y

IIP number or IIP data (Index of Industrial Production) is a measurement

which represents the status of production in the industrial sector for a givenperiod of time compared to a reference period of time.

Monetary Policy Changed Stance

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y y

Monetary Policy Real Estate Stance

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y y

Monetary Policy Real Estate Stance

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y y

Real Estate Stance Steps Taken by RBI

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Loan-to-value ratio lowered to 80% from 85%

Standard asset provisioning requirements increased to 1% from

0.40% for all teaser home loan rates Increased Risk Weight for residential housing loans of Rs. 75

lakhs & above to 125%

Total exposure of UCBs to realty sector restricted to 15% of their

total deposit

Real Estate Stance Impact

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Monetary Policy RBI in Growth-Inflation Fix

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