Analysis of RBI Macro Economic Policies

Description
Highlights the monetary policy of RBI in general.

MONETARY POLICY

By Yogen Mehta Jackey Kothia Kruti Killawala Shabnam Kadwani Alan Rego

113 124 112 127 115

Reserve Bank of India

Introduction

Reserve Bank of India

Structure, Working

Monetary Policy

Meaning

• The part of the economic policy which regulates the level of money in the economy in order to regulate inflation, improve balance of payments, increase gross national product etc. RBI, in case of India controls the monetary policy. • The policy statement traditionally announced thrice a year through 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 to time depending upon state of economy

Monetary Policy

Aims, Objectives

• Maintain price stability • Flow of credit to the productive sector of economy • Stability of national currency • Growth in employment & income • Achieving foreign exchange stability • Managing suitable level of investment and savings • Regulating rate of interest & induce higher level of investment • Achieving monetary equilibrium to ensure equality between demand & supply of money

Monetary Policy

Types of Control

MONETARY

POLICY
QUALITATIVE QUANTITATIVE

CONTROL

CONTROL

Monetary Policy

Quantitative Tools

• Bank Rate-The rate at which RBI extends credit to commercial Banks.

• Cash Reserve Ratio - The percentage of bank’s deposits which they must keep as cash with RBI.
• Statutory Liquidity Ratio - A commercial Bank has to keep a portion of total deposits with itself in liquid assets. • Open Market Operations

• Liquidity Adjustment Facility – Repo & reverse Repo
• MSS – Market stabilization scheme

Monetary Policy

Qualitative Tools

• 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 discourage activities which are regarded as inessential or undesirable.

Monetary Policy

Tool - Bank Rate

BANK RATE
• Banks use this rate to price their Long term loans to individual and companies
BANK RATE

=

LENDING RATE

=

AGGREGATE MONEY EXPENDITURE

=

INFLATION

• This tool now not much in use and remains same since years .

Monetary Policy

Tool – Cash Reserve Ratio

CASH RESERVE RATIO
• RBI has the power to vary this ratio and there by use it as an instrument 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 its depositors, and failure to do so may eventually result in failure of the bank.
CRR

=

EXCESS RESERVES FOR BANK LENDING

=
=

CREDIT

CRR

=

EXCESS RESERVES FOR BANK LENDING ABSORB FOREIGN CAPITAL FLOW

CREDIT CURRENCY

Monetary Policy

Tool – Statutory Liquidity Ratio

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 the foundation of the 1992 Harshad Mehta scam.

Monetary Policy

Tool – Open Market Operations

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.

Monetary Policy

Factors Affecting Policy

• Government agenda and development plans. • Recommendation of Narshimham committee,Tarapore committee and Khan committee report. • Inflation and price situation. • Credit and liquidity condition.

• Foreign money inflow (specially USD).
• IMF and World bank.

Monetary Policy

Equilibrium interest attained

Increase in output => Increase in transactions => Increase in money demand
Money supply

i

New Equilibrium Interest rate

Equilibrium Interest rate
Money demand

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

Monetary Policy

Equilibrium interest (r) attained

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

i

Money supply

Equilibrium Interest rate New Equilibrium Interest rate

Money demand

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

Monetary Policy

Action Taken

RBI’s Target

Monetary Policy

Action Taken

Liquidity Sucked out Rs.47,000 Crore est.

Monetary Policy

Action Taken

CRR and PLR 2007-2008
14.00

13.00
12.00 11.00 10.00
%

13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25

13.00

12.75

9.00

8.00
7.00

7.50 7.00 7.00 7.00

7.50

7.50

7.50

6.00

6.00
5.00

6.25

6.50

6.50

6.50

6.50 Septe Octob Nove Dece Janua Febru Marc mber er mber mber ry ary h 7.00 7.00 7.00 7.50 7.50 7.50 7.50 13.25 13.25 13.25 13.25 13.25 13.00 12.75

06 Apr 2007 CRR 6.00 PLR 13.25

20 Augu Apr May June July st 2007 6.25 6.50 6.50 6.50 6.50 13.25 13.25 13.25 13.25 13.25

Monetary Policy Money Supply - M3 2007-2008
4500000.00

Action Taken

4000000.00

3500000.00

3000000.00

2500000.00

2000000.00

1500000.00

May

May

February

January

January

February

February

March

March

November

September

September

November

August

August

August

October

October

December

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

December

March

June

June

July

April

April

July

Monetary Policy

Impact

IIP Growth Rate ( yoy, %) 2007-2008
14.0 12.0

11.5

10.0

8.4
8.0

8.2

8.5

6.0

4.0

2.0

0.0

2004-05

2005-06

2006-07

2007-08

IIP number or IIP data (Index of Industrial Production) is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time.

Monetary Policy

Action Taken

RBI’s Target 5 %

Monetary Policy

Action Taken

CRR, Repo and Reverse Repo 2008-2009
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 02 16 30 04 11 25 Aug April June May May May July July July ust CRR 7.50 7.75 8.00 8.25 8.25 8.25 8.50 8.75 8.75 Repo 7.75 7.75 7.75 7.75 8.25 9.00 9.00 9.00 9.00 Rev Repo 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

Liquidity Injected Rs.1,60,000• Lehman Brosest. Crore Crisis
• Liquidity Crunch
07 Sept 10 17 Nov emb Octo Octo emb er ber ber er 9.00 9.00 6.50 6.00 9.00 8.00 8.00 7.50 6.00 6.00 6.00 6.00 14 Nov emb er 5.50 7.50 6.00 Dec 02 23 Febr Mar emb Janu Janu uary ch er ary ary 5.50 5.50 5.00 5.00 5.00 6.50 5.50 5.50 5.50 5.00 5.00 4.00 4.00 4.00 3.50

Monetary Policy
CRR and PLR 2008-2009
15.50

Action Taken

13.50

14.00 14.00 14.00 13.25 13.25 13.25 13.25 12.75 12.75 12.75 12.75 12.75 13.50 13.50 13.50

11.50

12.50 12.50 12.50 12.50

9.50

%

7.50

7.50
5.50

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
3.50

April

02 16 30 04 June May May May July

11 July

10 17 07 14 02 23 25 Augu Septe Dece Febru Marc Octo Octo Nove Nove Janua Janua July st mber mber ary h ber ber mber mber ry ry

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 12.75 12.75 12.75 12.75 12.75 13.25 13.25 13.25 13.25 14.00 14.00 14.00 13.50 13.50 13.50 12.50 12.50 12.50 12.50

Monetary Policy Money Supply - M3 2008-2009
5000000.00

Action Taken

4800000.00

4600000.00

4400000.00

4200000.00

4000000.00

3800000.00

3600000.00

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

Monetary Policy

Impact

IIP Growth Rate ( yoy, %) 2008-2009
14.0 12.0

11.5

10.0

8.2
8.0

8.5

6.0

4.0

2.8

2.0

0.0

2005-06

2006-07

2007-08

2008-09

IIP number or IIP data (Index of Industrial Production) is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time.

Monetary Policy

Action Taken

RBI’s Target 6.5 %

Monetary Policy

Action Taken

CRR, Repo and Reverse Repo 2009-2010
6.00 5.50 5.00 4.50 4.00 3.50 3.00 April May June CRR 5.00 5.00 5.00 Repo 4.75 4.75 4.75 Rev Repo 3.25 3.25 3.25
%

• Recovery

Liquidity sucked out Rs.36,000 Crore est.
5 Augu Septe Octo Nove Dece Janua July Febru st mber ber mber mber ry ary 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 19 Febru ary 5.50 4.75 3.25 Marc h 5.75 5.00 3.50

Monetary Policy CRR and PLR 2009-2010
13.50
12.50 11.50 10.50 9.50 8.50 7.50 6.50 5.50
%

Action Taken

12.25

12.25

12.25

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

5.50 4.50 3.50 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

5.75

5 19 Augus Septe Octob Nove Dece Janua Marc April May June July Febru Febru t mber er mber mber ry h ary ary 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 12.25 12.25 12.25 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00

Monetary Policy Money Supply - M3 2009-2010
5800000.00

Action Taken

5600000.00

5400000.00

5200000.00

5000000.00

4800000.00

4600000.00

4400000.00

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

Monetary Policy

Impact

IIP Growth Rate ( yoy, %) 2009-2010
14.0

12.0

11.5 10.5

10.0

8.5
8.0

6.0

4.0

2.8
2.0

0.0

2006-07

2007-08

2008-09

2009-10

IIP number or IIP data (Index of Industrial Production) is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time.

Monetary Policy

Action Taken

RBI’s Target 7.5 %

Monetary Policy

Action Taken

CRR, Repo and Reverse Repo 2010-2011
7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50
%

• High Food inflation • IIP Slowing a tad
30 April 6.00 5.25 3.75 May 6.00 5.25 3.75 June 6.00 5.25 3.75 July 6.00 5.62 4.25 August 6.00 5.62 4.25 Septe Octobe Novem mber r ber 6.00 6.00 6.00 6.00 6.00 6.25 5.00 5.00 5.25 Decem Januar Februa ber y ry 6.00 6.00 6.00 6.25 6.50 6.50 5.25 5.50 5.50

02 April CRR 5.75 Repo 5.25 Rev Repo 3.75

3.00

Monetary Policy

Action Taken

CRR and PLR 2010-2011
13.00 12.00 12.00 11.00 10.00 9.00 9.00 8.00 8.00 7.00 6.00 5.00 4.00 5.75 8.00 8.00 8.50 8.50 8.50
%

12.00

12.00

12.00

9.50

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

6.00

02 April CRR 5.75 PLR 12.00

30 April 6.00 12.00

May

June

July

August

6.00 12.00

6.00 12.00

6.00 8.00

6.00 8.00

Septe Octobe Novem Decem Januar Februa mber r ber ber y ry 6.00 6.00 6.00 6.00 6.00 6.00 8.00 8.50 8.50 8.50 9.00 9.50

Monetary Policy Money Supply - M3 2010-2011
6400000.00

Action Taken

6200000.00

6000000.00

5800000.00

5600000.00

5400000.00

5200000.00

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

Monetary Policy

Impact

IIP Growth Rate ( yoy, %) 2010-2011
12.0

10.5
10.0

8.5
8.0

8.3

6.0

4.0

2.8
2.0

0.0
2007-08 2008-09 2009-10 2010-11
IIP number or IIP data (Index of Industrial Production) is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time.

Monetary Policy

Changed Stance

Monetary Policy

Real Estate Stance

Monetary Policy

Real Estate Stance

Real Estate Stance

Steps Taken by RBI

• 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

Monetary Policy

RBI in Growth-Inflation Fix



doc_247137569.pptx
 

Attachments

Back
Top