Download - Monetary Policy & its Impact
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Submitted byGroup 1
Aman Sachdev (12DM 016) Anuj Pasricha (12DM 030)
Amit Mantry (12DM 019) Arnav Shankar (12DM 035)
Ankit Sood (12DM 024) Asif Ali (12DM 040)
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MONETARY POLICY
Objectives
Price Stability
Controlled Expansion of Bank Credit
Desired Distribution of Credit
Equitable Distribution of Credit
Promote Efficiency
Reduce Rigidity
Restriction of Inventories
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Monetary Tools
Open Market Operations
Cash Reserve Ratio
Statutory Liquidity Ratio
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Bank Rate
Repo Rate and Reverse Repo Rate
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MONETARY POLICY 2009-2010
Economic Scenario Exceptionally challenging circumstances - Crash of Lehman Brothers
Focus on minimising impact
Policy shifted to monetary easing
Economic activity slowed during Q1 and Q2 of 2008-2009 as compared
with over 9% in the previous year
Sharp fall in Q3
Growth during the first three quarters of 2008-2009 - 6.9% compared to
9% during the previous year GDP Growth 2008-2009 6.7%
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Table 1: Real GDP Growth (%)
Q1 Q2 Q3 April-December
Sector (April-June) (July-September) (October-December)
2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09
Agriculture 4.4 3.0 4.4 2.7 6.9 -2.2 5.5 0.6
Industry 8.5 5.2 7.5 4.7 7.6 0.8 7.9 3.5
Services 10.7 10.2 10.7 9.6 10.1 9.5 10.5 9.7
Overall 9.1 7.9 9.1 7.6 8.9 5.3 9.0 6.9
Source: Central Statistical Organisation (CSO).
0
1
2
3
4
5
6
7
8
9
Q1 2008 Q2 2008 Q3 2008 Q4 2008
GDP Growth Rate
GDP Groth Rate
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Wholesale Price Index (WPI), decelerated sharply from 12.91 per cent on
August 2, 2008 to 0.26 per cent by March 28, 2009.
Table 2 : Annual Inflation Rate (%)
Wholesale Price Index (WPI) 29-Mar-08 28-Mar-09
(y-o-y) (y-o-y)
WPI - All Commodities 7.75 0.26
WPI - Primary Articles 9.68 3.46
WPI - Food Articles 6.54 6.31
WPI - Fuel Group 6.78 -6.11
WPI - Manufactured Products 7.34 1.42
WPI - Manufactured Food Products 9.40 7.51
WPI - Excluding Fuel 8.01 2.01
WPI - Excluding Food Articles and Fuel 8.38 0.95
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Response to the slowdown since mid - September 2008 Repo Rate cut by 400
basis points and Reverse Repo by 250 basis points
CRR reduced by 400 basis points
In response to the action by RBI banks reduced their deposit and lending rates
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Reduction in the range of term deposit rates between October 2008 - April
18, 2009 - 125-250 basis points by public sector banks
75-200 basis points by private sector banks
100-200 basis points by five major foreign banks
Reduction in CRR Reduces Reserve Money
Money Multiplier Rises
M3 expands with a lag
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Table 5: Annual Variations in Monetary Aggregates
(Per cent)
Item Annual Variations
2007-08 2008-09
Reserve Money 31.0 6.4
Money Supply (M3) 21.2 18.4
M3 (Policy Projection) 17.0-17.5* 19.0**
Money Multiplier 4.33 4.82
*Policy projection for the financial year as indicated in the Annual Policy Statement 2008-09 (April 2008).
**Policy projection for the financial year as indicated in the Third Quarter Review of Monetary Policy
2008-09 (January 2009).
Reserve Bank Actions since mid Sep 2008 - liquidity of over Rs.4,22,000
40000 Cr for credit expansion
Growth in non-food bank credit (year-on-year basis) decelerated from a peak of 29.4
per cent in October 2008 to 17.5 per cent by March 2009.
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STANCE
Measures since mid September 2008 Repo rate was reduced by 400 basis points from 9.0 per cent to 5.0 per
cent
Reverse repo rate was reduced by 250 basis points from 6.0 per cent to
3.5 per cent.
The cash reserve ratio (CRR) was reduced by 400 basis points from 9.0
per cent to 5.0 per cent.
The statutory liquidity ratio (SLR) was reduced from 25.0 per cent of to
24.0 per cent.
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ASSESMENT
The global financial and economic outlook continues to be unsettled and
uncertain
Assessment by major international agencies projected sharp contraction
in global trade volumes in 2009
The assessments projected little chance of global economic recovery in2009.
Therefore the Reserve Bank will continue to maintain vigil, monitor
domestic and global developments, and take swift and effective action to
minimise the impact of the crisis and restore the economy to a high
growth path consistent with price and financial stability.
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MONETARY MEASURES 2009-2010
Unchanged at 6%
To reduce the repo rate by 25 basis points from 5.0 per cent to 4.75 per
cent.
To reduce the reverse repo rate under by 25 basis points from 3.5 per
cent to 3.25 per cent with immediate effect. The cash reserve ratio (CRR) was retained unchanged at 5.0.
Reserve Bank indicated its intention to purchase government securities
under open market operations (OMO) for an indicative amount of Rs.80,
000 crore during the first half of 2009-10.
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Impact
Economy was on the track of recovery, the GDP growth rate was
estimated to be between 7.2% to 7.5% for 2009-2010 as against 6.7% for
the year 2008-2009.
0
1
2
3
4
5
6
7
8
9
10
2007-08 2008-09 2009-10
GDP Growth Rate
GDP Growth Rate
The monetary measures initiated in the wake of the global financial crisis played
an important role, first in mitigating the adverse impact from contagion and then in
ensuring that the economy recovered quickly.
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Wholesale Price Index (WPI), accelerated to 9.9 per cent in March 2010,
exceeding the Reserve Banks baseline projection of 8.5 per cent for
March 2010.
0
2
4
6
8
10
12
March08 March09 March10
WPI
WPI
Monetary aggregate growth was as per the projections.
Non-food credit growth recovered from its intra-year low of 10.3 per cent in
October 2009 to 16.9 per cent by March 2010
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Monetary Policy 2010-2011
Economic Scenario Set against complex economic backdrop
EMEs significantly ahead on the recovery curve
Indias growth-inflation dynamics were in contrast to the overall global
scenario
Inflationary pressures: triggered by supply side factors.
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GDP -7.4 %
IIP growth rates
In December 2009 IIP growth rate was 17.6%
In January 2010 IIP growth rate was 16.7%
In February 2010 IIP growth rate was15.1
Month IIP
Dec-09 17.6
Jan-10 16.7
Feb-10 15.10
5
10
15
20
Dec-09 Jan-10 Feb-10
IIP
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Imports expanded
In November 2009 import expanded by 2.6%
In November 2009 import expanded by 32.4 %
In January 2010 import expanded by 35.5%
In February 2010 import expanded by 66.4%
Month Import
Nov-09 2.6
Dec-09 32.4
Jan-10 35.5
Feb-10 66.40
10
20
30
40
50
60
70
Nov-09 Dec-09 Jan-10 Feb-10
Import
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Projected GDP
Projected Inflation
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Liquidity Condition:
Surplus
Bank absorbed Rs.1,00,000 crore up to Feb 12 2010
Credit Condition:
Non-food credit grew: Oct 2009 10.3%March 2010 16.9%
Total flow of financial resources from banks, domestic non-bank and
external sources to the commercial sector during 2009-10 at
Rs.9,71,000 crore (Rs.8,34,000 crore the previous year) Monetary Aggregates
Money supply (M3) decelerated from 20.0 per cent to 16.4 per cent
(Feb 2010) then increased to 16.7 per cent.
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SLR set to its pre crisis level in Oct 2009
CRR increase by 75 basis point in Jan 2010
Due to continues increase in inflation, Repo and Reverse Repo
increased by 25 basis points each
Policy stance for 2010-11 was guided by the following major
considerations: Recovery was consolidating- quick rebound of growth during 2009-10
despite failure of monsoon rainfall suggested that the Indian economy
had become resilient and because of this pprojected growth rate of
2010-11 was higher than 2009-10.
Second, inflationary pressures had accentuated in the recent period
STANCE
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Bank Rate : 6 percent
Repo Rate : 5 to 5.25 percent
Reverse Repo Rate : 3.25 to 3.75 percent
CRR : 5.75 to 6 percent
Expected Outcomes Contained inflation
Sustained recovery
Government borrowing requirements and the private credit demand will be
met
Policy instruments will be further aligned in a manner consistent with the
evolving state of the economy.
MEASURES
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Impact
The economy continued with the momentum of late 2010, the economy wasestimated to grow by 8.6% during 2010-2011
In line with the monetary policy the year began with a tight liquidity condition.
Growth slowed despite a significant increase in reserve money
The monetary policy was not able to control inflation, the rising commodity prices
caused inflation to grow.
6.2
6.4
6.6
6.8
7
7.2
7.4
7.6
7.8
8
8.2
2008 2009 2010
GDP growth rate
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Monetary Policy 2011-2012
Main goal was to facilitate recovery in the phase of global uncertainty
Control supply side inflation, driven by food products
Major concerns for monetary policy 2011-12
Rising global commodity price
Moderation in demand
Core inflation was overshot
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Projected GDP RATE & INFLATION
RATE
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Economic Scenario
Economy was expected to grow at 8.6% in 2010-2011(with confidencelevel of 90%).
Inflation- divided in three periods
First period (April to July)- 3.5% increase in WPI largely by food item, fuel,
power group
Second period (August to November)-1.8% increase in WPI largely by food
and non-food primary articles and minerals
Third period (December to March)-3.4% increase in WPI largely by fuel
and power group and non-food manufactured products
International petroleum prices were increasing which increased the price
of domestic product.
Input cost was rising as a result the price of manufactured goods increased
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Effective lending rates- increase from 9.7 per cent in 2010-11 to 10.3 per
cent in 2011-12
Increased Base Rates by 50-165 basis points between October 2010 to
March 2011
Broad money (M3) growth was at 15.9% which was below the
expectations of RBI i.e. 17%- slow deposit growth and acceleration in
currency growth
Liquidity conditions transited to a deficit mode towards end-May 2010.
Reason: government built up cash reserve from spectrum auction which
fell down this year.
Liquidity conditions became even tighter in October 2010-
above-normal build up in government cash balances
high currency demand growth and credit growth outpacing deposit
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STEPS TAKEN Temporary waiver of penal interest for any shortfall in maintenance of
statutory liquidity ratio (SLR)
Reduction in the SLR by one per cent
Conducting open market operations
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Stance Since 2009 the cash reserve ratio (CRR) has been raised by 100 basis
points.
Policy rates were raised by 8 time, repo rate by 200 basis points and thereverse repo rate by 250 basis points.
DRIVING FORCES Inflation which remained much above the comfort level of the Reserve Bank.
Sharp increase in non-food manufactured product inflation
Uncertainty in global commodity prices which posed a major risk to domesticinflation
Maintain an interest rate environment that moderates inflation and anchorsinflation expectations.
Foster an environment of price stability that is conducive to sustaining growth in
the medium-term coupled with financial stability. Manage liquidity to ensure that it remains broadly in balance, with neither a large
surplus diluting monetary transmission nor a large deficit choking off fund flows.
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Monetary Measures
Repo Rate was increased from 6.75 % to 7.25%
Reverse Repo Rate was adjusts to 6.25%
Bank Rate-retained at 6.0 per cent.
Cash Reserve Ratio of Scheduled Banks was retained at 6.0%
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Expected results
Contain inflation by reining in demand side pressures, and anchor
inflationary expectations; and
Sustain the growth in the medium-term by containing inflation.
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Impact GDP growth during April-December 2011 slowed significantly to 6.9 per cent
from 8.1 per cent in the corresponding period of the previous year, this was
not only in response to the tight monetary policy but also because of globalchallenges
Wholesale price index (WPI) inflation, which remained above 9 per cent duringApril-November 2011, moderated to 6.9 per cent by end-March2012wholesale price index (WPI) inflation
Money supply (M3) growth, which was 17 per cent at the beginning of thefinancial year 2011-12, reflecting strong growth in time deposits, moderatedduring the course of the year to about 13 per cent by end-March 2012, lowerthan the Reserve Banks indicative trajectory of 15.5 per cent, mirroringtightness in primary liquidity.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
March2010 March2011 March2012
Inflation Rate
Inflation Rate