Monetary Policy & Recent Provisions of Monetary Policy By: Prof. Neha Nankani.

Content What is Monetary Policy? Why it is issued? (Objectives) When it is issued? When it is reviewed? Instruments of Monetary policy. Recent Provisions of Monetary Policy & Its Expected Outcomes. (First Quarter Review of Monetary Policy 2010-2011)

How it eats your money silently Affects your investments! "Inflation" & How it eats your money silently Affects your investments!

Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Increases in the amount of money in circulation. Each unit of currency buys fewer goods and services. An erosion in the purchasing power of money.

Price Purchasing Power Money Supply Inflation

Price Purchasing Power Money Supply Inflation

How Inflation Eats Our Money & Economy & Affects Investment….

Moral of story Always invest money. The rate of return on your investment is higher than the rate of inflation. Always Try to invest money at high inflation.

Economic Cycle

Monetary Policy Monetary policy is a tool used by the central bank to manage money supply in the economy in order to achieve a desirable growth. The central bank controls the money supply by increasing and decreasing the cost of money, the rate of interest.

Who Issues Monetary Policy? RBI

When it is Issued & Reviewed RBI Governor announces Annual Policy Statement in Every April. Every Quarterly RBI governor reviews the monetary policy. April – June July – September October- December January - March

Objectives of Monetary Policies Economic Growth. Regulation of Money Supply. Price Stability. Moderate Interest Rates. Exchange Rate Stability. Maximize Employment. Minimize Inflation.

Instruments of Monetary Policy Open Market Operation Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio

Open Market Operation Buying and selling of government securities & RBI issues some bonds to stabilize money supply in the economy. Buying of securities is carried out to infuse money into the economy while securities are sold to absorb excess money.

Bank Rate The rate at which a central bank is prepared to lend money to its domestic banking system.

Repo Rate The Repo rate is the rate at which the banks borrow from the central bank.

Reverse Repo Rate The Reverse repo rate is the rate at which the central bank borrows from the banks.

Cash Reserve Ratio Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio.

Statutory Liquidity Ratio SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit.

RBI Governor Dr. D. Subbarao have announced Annual Policy Statement for the year 2010-11in 20 April 2010. This year First Quarter Monetary Policy have been reviewed on 22 July 2010.

First Quarter Review Introduction Section-I The present state of economy Global Economy a) The  IMF raised its global growth projection for 2010 to 4.6 per cent from its April projection of 4.2 per cent on the strength of Q1 growth rates. b) In the US, recovery remains constrained. c) EMEs are witnessing strong growth. d) Inflation in advanced economies is subdued due to large output gaps and high unemployment rates.

Domestic Economy The Indian economy grew by 7.4 per cent in 2009-10. The IIP (index for industrial Production) is also showing positive growth. Monsoon performance has been much better than it was last year. WPI rose to 10.6 per cent in June 2010. Final WPI inflation numbers for recent months can be expected to be higher.

Money supply (M3) growth on a year-on-year basis moderated from 16 Money supply (M3) growth on a year-on-year basis moderated from 16.8 per cent at end-March 2010 to 15.3 per cent as on July 2, 2010 reflecting a slowdown in the growth in bank deposits. On the lending side, benchmark prime lending rates (BPLRs) of scheduled commercial banks remained unchanged from July 2009 till end-June 2010. The banking system switched over to the Base Rate system with effect from July 1, 2010. The Base Rates set by major banks are in the range of 7.25- 8.0 per cent. Money market instruments increased, reflecting autonomous tightening of monetary conditions by 150 basis points.

The foreign exchange market saw volatility increase relative to the previous quarter, with the rupee showing two-way movements in the range of Rs.44.33-Rs.47.57 per US dollar. Of the budgeted net market borrowing of the Central Govt. for 2010-11 at Rs. 3,45,010 crore, about 38.5 per cent (Rs.1,32,900 crore) of the borrowing was completed by mid- July 2010. Both exports and imports continued to expand in contrast to the contraction they showed during the corresponding period of last year.

Section-II Outlook and Projections Global Outlook Recent data and analysis suggest slowing down of the global growth momentum and the expectation is that global growth in the second half of 2010 will be lower than that in the first half. Just like growth, inflation around the world too has been multi-speed. The inflation scenario in advanced economies has been shaped by high unemployment, low capacity utilization and renewed uncertainties about the financial sector.

The slowdown of the Chinese economy The slowdown of the Chinese economy. Consequently, global inflationary pressures are expected to be subdued over the next few months. Domestic Outlook Growth in exports, which turned positive in October 2009, picked up further in subsequent months despite concerns over the external demand outlook due to the sovereign debt problem in euro area. If the global recovery slows down, it will affect all EMEs, including India, through the usual exports, financing and confidence channels.

The strength of the recovery is also reflected in the sales and profitability growth of the corporate sector. real GDP growth for 2010-11 is revised to 8.5 per cent, up from 8.0 per cent with an upside bias as indicated in April 2010 policy statement. This upward revision is primarily based on better industrial production and its favorable impact on the services sector, giving due consideration to the global scenario.

Growth forecast for India at 9 Growth forecast for India at 9.4 per cent for calendar 2010 is based on GDP at market prices, whereas other projections, including that of the Reserve Bank, are based on GDP at factor cost.

WPI inflation for March 2011 has been raised to 6. 0 per cent from 5 WPI inflation for March 2011 has been raised to 6.0 per cent from 5.5 per cent as indicated in the April policy statement. The Reserve Bank would like to achieve price stability and anchor inflation expectations.

Monetary Aggregates Money supply (M3) growth at 15.3 per cent is below the indicative projection of 17.0 per cent, Non-food credit growth at 22.3 per cent was marginally higher than the indicative projection of 20.0 per cent. These numbers are indicative projections and not targets.

Risk Factor A potential slowdown in capital inflows. (imports have grown faster than exports). Global investors may significantly reduce the flow of capital into EMEs (Emerging Market Economies). The risk of inadequate rainfall . Slower global growth will help lower energy and commodity prices. Unutilized global capacity in many sectors will also ease pressure on prices.

Section-III The Policy Stance Our policy stance for 2010-11 has been conditioned by three major considerations: Domestic economic recovery is firmly in place and is strengthening. Inflationary pressures have exacerbated and become generalized, with demand-side pressures clearly evident. Despite the increase in the policy rates by 75 basis points cumulatively, real policy rates are not consistent with the strong growth that the economy is now witnessing.

Section-IV Monetary Measures On the basis of the current assessment and in line with the policy stance as outlined in Section III, the Reserve Bank announces the following policy measures: The Bank Rate has been retained at 6.0 per cent. 50-basis-point rise for the reverse repo. The rates now stand at 4.50 percent. RBI opted for a 25-basis-point increase in its repo rate, the rate at which it lends to commercial banks. The rates now stand at 5.75 percent. The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent.

Expected Outcomes Monetary policy actions are expected to: a.    Moderate inflation by reining in demand pressures and inflationary expectations. b.    Maintain financial conditions conducive to sustaining growth. c.    Generate liquidity conditions consistent with more effective transmission of policy actions. d.    Reduce the volatility of short-term rates in a narrower corridor.

Impact Of Bank Rate The Bank Rate has been retained at 6.0 percent.

Impact of Repo Rate RBI opted for a 25-basis-point increase in its repo rate, the rate at which it lends to commercial banks. The rates now stand at 5.75 percent.

Impact Of Reverse Repo Rate 50-basis-point rise for the reverse repo. The rates now stand at 4.50 percent.

Impact of CRR CRR of scheduled banks has been retained at 6.0 percent

LAF This asymmetric raise in rates narrows the LAF corridor from 150 basis points to 125 basis points.

Thank You……..