rbi's monetary policy--final version

8/3/2019 RBI's Monetary Policy--Final Version

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The Monetary and Credit Policy isthe policy statement, traditionallyannounced twice a year, throughwhich the Reserve Bank of India

seeks to ensure price stability for theeconomy.

These factors include - money supply,interest rates and the inflation. Inbanking and economic terms moneysupply is referred to as M3 - whichindicates the level (stock) of legalcurrency in the economy.

What is the MonetaryPolicy?



When is the Monetary Policy

announced?

Historically, the Monetary Policy is announced

twice a year - a slack season policy (April-

September) and a busy season policy (October-

March) in accordance with agricultural cycles.

These cycles also coincide with the halves of

the financial year.



What are the objectives of the

Monetary Policy?

The objectives are to maintain price stability and

ensure adequate flow of credit to the productive

sectors of the economy.

Stability for the national currency (after looking atprevailing economic conditions), growth in

employment and income are also looked into. The

monetary policy affects the real sector through long

and variable periods while the financial markets arealso impacted through short-term implications.



Terms related to monetary policy

Cash reserve ratio

Statutory liquidity ratio

Bank rate Inflation

Money supply

Repo rate Open market operation



A case for easing monetary policy in

India

In January 2007, a meeting with all bank

chiefs , the Finance Minister requested them to

soften interest rates, so as to maintain the

current growth rates.

While oil prices continue to move upwards,

Central Banks have to exercise their monetary

policy levers by keeping a balance between the- growth and inflation.



In early 2007, with inflation threatening to

touch 7% and the Government facing

coalition uncertainty,RBI was facing a difficult

situation.

The rising inflation in the early part of the

year, coupled with the surge in foreign

investments, both FDI and FPI, resulting inrising forex reserves raised major concerns

within both the RBI and the Government.



The RBI responded with a series of monetary

tightening measures.

The repo rate (at which RBI lends to banks)

rose to 7.75%.

the CRR went up to 7.5%.



This monetary tightening has yielded results in thelast six months, as inflation has been brought downbelow 4%.

This means the RBI should ease the monetarycontrols and encourage investment. It is the time foraggressively cutting rates.

A loose monetary policy which is essential forsustaining the high 9-10% growth rates.



The US and Europe are easing their monetary policyout of compulsions arising from the sub-primemortgage related credit squeeze and the imminentdangers of a recession.

In an increasingly integrated global economy, any USrecession and low interest rates presents a greatopportunity for India to sustain high economicgrowth without inflationary pressures.



A hard landing in the US and recessionelsewhere in the developed world, will cause afall in global aggregate demand, which will

adversely affect the export-led growtheconomies.

This will in turn dampen global oil, energy,food, and other commodity prices, and forcedown inflationary trends and lower importcosts.



1. Low interest rates are critical for sustaining

the rapidly increasing investment rate.

Indian economic growth is extremely interest

rate sensitive. The limitations imposed on

accessing external borrowings, also increases

the dependence on local bank credit.



A recession in the US and elsewhere will reduce

consumption demand and hence lower aggregate

demand, which in turn is likely to put downward

pressure on import prices. 6. In the event of a recession in the US causing drop

in FII inflows into emerging markets, a loose

monetary policy could help provide the internal thrust

to sustain and stabilize the stock markets.



In the event of a capital flight into emerging markets,

low interest rates will reduce the incentives for

financial market distortions that could encourage

undesirable, hot money inflows. By making rupee investments less attractive

compared to the other currencies, low interest rates

will reduce capital inflows and thereby control the

exchange rate appreciation of rupee.



A low rate will leave the RBI with enough flexibilityto maneuver without compromising on growthconcerns, when the economy starts overheating.

The prevailing high interest rate regime had crowdedin the overwhelming share of domestic savings intobank deposits, and crowded out the development of alternate investment avenues in the financial markets.A low rate regime could provide the opportunity fordevelopment of such market.



A lower rate will ease the demand for External

Commercial Borrowings, which crossed $30

bn in 2007. While ECBs are to be welcomed as

a source of investment alternatives, an overreliance on them, especially on certain

categories, can have harmful medium and long

term implications .



The low interest rates will give a fillip to

consumption growth as hire purchase and

home loan markets will go up. The importance

of the consumption driven growth multiplierfor the economy is enormous. x

rbi's monetary policy--final version

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