Description
It also talks about India economy, Inflation, Monetary Aggregates, Monetary Policy Stance and Measures.
Monetary Policy and Press release of RBI 2010-11 Monetary policy is essentially a programme of action undertaken by the monetary authorities, generally the central bank to control and regulate the supply of money with the public and the flow of credit with a view to achieving pre-determined macroeconomic goals. Objectives:- The objectives of the monetary policy are growth, employment, stability of price , foreign exchange and the balance of payment equilibrium. Scope:-The scope of monetary policy depends largely on two factors:1. Level of monetization of the economy. 2. Level of development of the Capital Market. In an economy (EMEs emerging economies), all economic activities are carried out with money as a medium of exchange .Thus, the monetary policy works by changing the demand and supply for money and general price level. It is therefore capable of affecting all economic activities – i) Production iv)Investment and ii) Consumption v) Foreign Trade iii) Savings
It can affect all the major macroeconomic variables:i) GDP ii) Savings iii) Investments vi) Foreign Trade and iv)Employment vii) Balance of payment equilibrium
v) General Price level
Another Factor under the Monetary policy is how developed and integrated is the Capital Market Some instruments of monetary control (Bank rate, CRR) work through Capital Market. A Capital Market fully developed has the following features:1. A large number of financially strong commercial banks, financial institutions, credit organisations and short term bill market. 2. A major part of financial transactions are routed through the capital market. 3. The working of capital market is interlinked and interdependent. 4. Commodity sector is highly sensitive to the changes in the Capital market.
Instruments of Monetary Policy It refers to the economic variables that the central bank can change at its discretion with a view to controlling and regulating the supply and demand of money and the availability of credit. Monetary Instruments are of two categories:-
1. Quantitative measures-
i) Open Market Operations ii) Discount Rate (Bank rate) and iii) Cash Reserve ratio (CRR) ii) Change in lending margins
2. Qualitative or selective credit controliii) Moral Suasion iv) Direct Control
i) Credit Rationing
Press Release of RBI 2010-2011 The Banks agreed that the monetary measures announced by RBI were appropriate given the growth-inflation dynamics. It centred around three specific issues: (i) Government market borrowing programme (ii) Financial Inclusion (iii) Infrastructure financing. The programmed government borrowings may not crowd out private sector demand given the projected level of resources in the system. Banks assured the Reserve Bank that they share their commitment to financial inclusion and indicated that they will work innovatively to promote financial inclusion. Banks were concerned about their growing exposure to the infrastructure sector. Global Context Private spending in advanced economies continues to be constrained and inflation remains generally subdued making it likely that fiscal and monetary stimuli in these economies will continue for an extended period. Emerging market economies (EMEs) are significantly ahead on the recovery curve, but some of them are also facing inflationary pressures. This has prompted central banks in some EMEs to begin phasing out their accommodative monetary policies. Indian Economy Growth Industrial recovery has become more broad-based since the second quarter of 2009-10 and is expected to take firmer hold on the back of rising domestic and external demand with the exports and imports expanding since October/November 2009. Flow of resources to the commercial sector from both bank and non-bank sources has picked up. Under the assumption of a normal monsoon and sustained good performance of the industry and services sectors, for policy purposes, the Reserve Bank projects real GDP growth for 2010-11 at 8.0 per cent . Inflation There has been a significant change in the drivers of inflation in recent months. What was initially a process driven by food prices has now become more generalised. This is reflected in non-food manufactured products inflation rising from (-) 0.4 per cent in November 2009 to 4.7 per cent in March 2010. Three major uncertainties cloud the outlook for inflation:I) Monsoon Prospects 2) Volatile Crude prices 3) Demand Side pressures
On balance, keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent. Monetary Aggregates For policy purposes, money supply (M3) growth for 2010-11 is placed at 17.0 per cent. The aggregate deposits of scheduled commercial banks (SCBs) are projected to grow by 18.0 per cent. The growth in non-food credit of SCBs is placed at 20.0 per cent. Our exchange rate policy is not guided by a fixed or pre-announced target or band. Our policy has been to retain the flexibility to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. Recent experience has underscored the issue of large and often volatile capital flows influencing exchange rate movements against the grain of economic fundamentals and current account balances. There is, therefore, need to be vigilant against the build-up of sharp and volatile exchange rate movements and its potentially harmful impact on the real economy. Interest Rates-Mandating banks to switch over to the system of Base Rate from July 1, 2010 to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of monetary policy transmission.
Monetary Policy Stance Our monetary policy stance for 2010-11 has been guided by the following three considerations. 1) Despite the increase of 25 basis points each in the repo rate and the reverse repo rate in midMarch 2010, our real policy rates were still negative. We need to move in a calibrated manner in the direction of normalising our policy instruments. 2) The current episode of inflation, triggered by supply side factors, is developing into a wider inflationary process. Demand side pressures are now clearly discernible. There is, therefore, need to ensure that demand side inflation does not become entrenched. 3) There is a need to balance the monetary policy imperative of absorbing liquidity and ensuring that credit is available to both the Government and the private sector. Against this background, the stance of monetary policy is intended to:
? ? ?
Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. Maintain an interest rate regime consistent with price, output and financial stability.
Monetary Policy Measures Our Monetary Policy Statement 2010-11 specifies the following monetary measures:
i) The repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. ii) The reverse repo rate has been raised by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. iii) The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.
doc_792100303.docx
It also talks about India economy, Inflation, Monetary Aggregates, Monetary Policy Stance and Measures.
Monetary Policy and Press release of RBI 2010-11 Monetary policy is essentially a programme of action undertaken by the monetary authorities, generally the central bank to control and regulate the supply of money with the public and the flow of credit with a view to achieving pre-determined macroeconomic goals. Objectives:- The objectives of the monetary policy are growth, employment, stability of price , foreign exchange and the balance of payment equilibrium. Scope:-The scope of monetary policy depends largely on two factors:1. Level of monetization of the economy. 2. Level of development of the Capital Market. In an economy (EMEs emerging economies), all economic activities are carried out with money as a medium of exchange .Thus, the monetary policy works by changing the demand and supply for money and general price level. It is therefore capable of affecting all economic activities – i) Production iv)Investment and ii) Consumption v) Foreign Trade iii) Savings
It can affect all the major macroeconomic variables:i) GDP ii) Savings iii) Investments vi) Foreign Trade and iv)Employment vii) Balance of payment equilibrium
v) General Price level
Another Factor under the Monetary policy is how developed and integrated is the Capital Market Some instruments of monetary control (Bank rate, CRR) work through Capital Market. A Capital Market fully developed has the following features:1. A large number of financially strong commercial banks, financial institutions, credit organisations and short term bill market. 2. A major part of financial transactions are routed through the capital market. 3. The working of capital market is interlinked and interdependent. 4. Commodity sector is highly sensitive to the changes in the Capital market.
Instruments of Monetary Policy It refers to the economic variables that the central bank can change at its discretion with a view to controlling and regulating the supply and demand of money and the availability of credit. Monetary Instruments are of two categories:-
1. Quantitative measures-
i) Open Market Operations ii) Discount Rate (Bank rate) and iii) Cash Reserve ratio (CRR) ii) Change in lending margins
2. Qualitative or selective credit controliii) Moral Suasion iv) Direct Control
i) Credit Rationing
Press Release of RBI 2010-2011 The Banks agreed that the monetary measures announced by RBI were appropriate given the growth-inflation dynamics. It centred around three specific issues: (i) Government market borrowing programme (ii) Financial Inclusion (iii) Infrastructure financing. The programmed government borrowings may not crowd out private sector demand given the projected level of resources in the system. Banks assured the Reserve Bank that they share their commitment to financial inclusion and indicated that they will work innovatively to promote financial inclusion. Banks were concerned about their growing exposure to the infrastructure sector. Global Context Private spending in advanced economies continues to be constrained and inflation remains generally subdued making it likely that fiscal and monetary stimuli in these economies will continue for an extended period. Emerging market economies (EMEs) are significantly ahead on the recovery curve, but some of them are also facing inflationary pressures. This has prompted central banks in some EMEs to begin phasing out their accommodative monetary policies. Indian Economy Growth Industrial recovery has become more broad-based since the second quarter of 2009-10 and is expected to take firmer hold on the back of rising domestic and external demand with the exports and imports expanding since October/November 2009. Flow of resources to the commercial sector from both bank and non-bank sources has picked up. Under the assumption of a normal monsoon and sustained good performance of the industry and services sectors, for policy purposes, the Reserve Bank projects real GDP growth for 2010-11 at 8.0 per cent . Inflation There has been a significant change in the drivers of inflation in recent months. What was initially a process driven by food prices has now become more generalised. This is reflected in non-food manufactured products inflation rising from (-) 0.4 per cent in November 2009 to 4.7 per cent in March 2010. Three major uncertainties cloud the outlook for inflation:I) Monsoon Prospects 2) Volatile Crude prices 3) Demand Side pressures
On balance, keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent. Monetary Aggregates For policy purposes, money supply (M3) growth for 2010-11 is placed at 17.0 per cent. The aggregate deposits of scheduled commercial banks (SCBs) are projected to grow by 18.0 per cent. The growth in non-food credit of SCBs is placed at 20.0 per cent. Our exchange rate policy is not guided by a fixed or pre-announced target or band. Our policy has been to retain the flexibility to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. Recent experience has underscored the issue of large and often volatile capital flows influencing exchange rate movements against the grain of economic fundamentals and current account balances. There is, therefore, need to be vigilant against the build-up of sharp and volatile exchange rate movements and its potentially harmful impact on the real economy. Interest Rates-Mandating banks to switch over to the system of Base Rate from July 1, 2010 to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of monetary policy transmission.
Monetary Policy Stance Our monetary policy stance for 2010-11 has been guided by the following three considerations. 1) Despite the increase of 25 basis points each in the repo rate and the reverse repo rate in midMarch 2010, our real policy rates were still negative. We need to move in a calibrated manner in the direction of normalising our policy instruments. 2) The current episode of inflation, triggered by supply side factors, is developing into a wider inflationary process. Demand side pressures are now clearly discernible. There is, therefore, need to ensure that demand side inflation does not become entrenched. 3) There is a need to balance the monetary policy imperative of absorbing liquidity and ensuring that credit is available to both the Government and the private sector. Against this background, the stance of monetary policy is intended to:
? ? ?
Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. Maintain an interest rate regime consistent with price, output and financial stability.
Monetary Policy Measures Our Monetary Policy Statement 2010-11 specifies the following monetary measures:
i) The repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. ii) The reverse repo rate has been raised by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. iii) The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.
doc_792100303.docx