PRESENTATION

BY

MR. Ripal .A shroff

MR. keval .g parekh
ACKNOWLEDGEMENT

We are very much thankful to those people from whom

we have got help during the preparation of this
presentation.

We wish to express our gratitude to Ms. Shagun Arora

of NIS Academy under whose advice and guidance we
have completed this presentation.

This presentation is prepared by the full cooperation of

our team members with team spirit
 WHAT IS MONETARY POLICY

 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 twice 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 to time to time depending
upon state of economy
 AIM OF MONETARY POLICY
 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.
TYPES OF CONTROL
QUANTITATIVE - Tools
 Bank Rate-The rate at which RBI extends credit
to comm. Banks .
 CRR-The percentage of bank’s deposits which
they must keep as cash with RBI.
 SLR-A comm. Bank has to keep a portion of total
deposits with itself in liquid assets.
 Open Market Operations
 LAF – Repo & reverse Repo
 MSS – Market stabilization scheme
Qualitative Monetary Control
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.
Recommendation of
Narshimham committee
Nov.1991
 SLR should not be used for directed investment in
PSUs. It should be lower down to minimum limit of
25%
 CRR should be lower than the present rate. As an
instrument it should be used less & Govt. should
depend upon OMOs.
 Selective credit control should be slowly phased
out
 Prime lending rate of commercial bank should be
independent of RBI control
BANK RATE
 Banks use this rate to price their Long term
loans to individual and companies
 Increase in Bank rate Increase in lending rate
of Commercial Banks Decline in aggregate
money expenditure lowering inflation
and vice versa.
 This tool now not much in use and remains
same since years .
 TRENDS OF BANK RATE
Bank Rate In 1940’s BR was at
low 3% and
remained
unchanged till
1953.In 1953 RBI
adopted policy
controlled expansion
BR raised to 3.5%.It
reached at max.
level in 1991 12%.
Presently it is 6%
 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.
 Increase in CRR reduce the excess reserves
available to a bank for lending contracting Credit
 Increase in CRR absorbs Foreign Capital Inflows
checking rupees appreciation.
TRENDS OF CRR
 In beginning it was
5% of demand
deposit & 2% of time
deposits
 Reached max. in
1991,92 after 1993 it
followed Narsimham
report & decreased.
 But from dec.06 it
raised 7 times, 250bp
to cool credit growth
& supply.
STATUTORY LIQUIDITY RATIO

 Statutory Liquidity Ratio

 Narsimham committee recommended to
reduced it at minimum level. According to
that it is 25%and remains unchanged.
 Khan committee suggested abolishment of
SLR.

The buying & selling of these securities laid the

foundation of the 1992 Harshad Mehta scam.
TRENDS OF SLR

It was 25% in 1949

after that it increased
continuously
32%(1972)--- 35%
(1981)---36%(1984)---
38%(1988).
From 1997 it is
constant at 25%
OMOs-Meanings & Objectives

 Open Market Operations-these refer to the

sale and purchase of Govt. securities by
the RBI
 The main objective of these operations has
been to stabilizes the prices of Govt.
securities. The control of inflationary
pressures has, however been the
secondary objectives.
 It is used several times after 1991 for
controlling inflows.
 OMO - TOOLS
12

 Repo Rate 10

This is the rate at

8
which the central bank adds
funds to the monetary market.
Present rate 7.75% 6

 Reverse Repo Rate

4
The rate at which
the central bank borrows funds
from the market. It impacts 2

Govt. bond yields and short

term bank deposits. Present 0

rate 6%
0

5
1

8
0

0
0

0
0

0
0
2

2
Repo Rate Reverse Repo rate
Factors Effecting Monetary
Policies
 Govt. 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.
EFFECTS OF GLOBAL ECONOMY
ON RBI MONETARY POLICY
 The RBI is likely to keep its Monetary policy
tight in view of the uncertainties in global
financial markets and high prices of crude
oil and food items.

 The US Fed Reserves rate cuts put

pressure on RBI to lower rates. The
immediate pressure would come from the
FOREX market with bankers expecting the
rupees to firm up against the USD.
 Devaluation of Rupees
 RBI in extraordinary condition devaluated
Rupees 3 times in past .
 In Sep.1949-30.5%.(Due to Shadow of Colonial
system and aim of overall growth).
 In June 1966-36.5%(Due to crop failure and Indo-
pak.war).
 In 1991-20% in 3 phase (Due to economic
stagnation and failure of PSUs).
 After 1992-93 Rupees headed towards full
convertibility. Now value of Rupees almost
depends upon free market forces of demand
&supply.
 EFFECTS OF POLICY ON INDIAN
ECONOMY (A)
Interest Rate
1990 1994 1995-97 2003
All sector-specific The minimum rate The ceiling on Bank were
Interest rate prescriptions prescription withdrawn. rate on deposits advised to
Were abolished Bank free to charge were removed announce a
PLR benchmark
PLR
2008
Bank are advised to be
Proactive in credit scenario
 1.Economy opens in 1990 and reforms start.
2.Narsimham committee for autonomy in banking sector.
3.Second generation reforms from 2001.
4.Banks have to compete with multinational banks in 21st century.
 EFFECTS OF MONETARY POLICY
ON ECONOMY (B)
Inflation & price control
It is characterized by increase in quantity
of money in proportion to buying power.
 According to Castle and Keynes domestic price
stability should be main objective of central bank’s
monetary policy.
 RBI declared its policy endeavour would be to
keep inflation close to 5%.
 For controlling inflation RBI adopted cheap or dear
credit policy and selective credit control.
 EFFECTS OF MONETARY POLICY
ON ECONOMY (C)
On Foreign Exchange
 RBI has to maintain equilibrium rate of exchange
because any change in rate will have repercussion
on BOP of India.
 RBI generally uses CRR and Repo rates for
checking inflow or outflow foreign currency
 From 2000 control of RBI on foreign exchange
become less under FEMA act.
 2001 onwards exchange rate is decided by
market forces and RBI only monitor the process.
 Catch 22 situation
 First situation:- USD inflow > appreciation of
INR > increase in trade deficit > any further
increase completely ruin the Export economy.
 RBI has no option but to check this trend.
 Second situation:- OMOs by RBI or increase in
reserve rates > Credit crunch >costly loan +
soaring oil prices>manufacturing slow down
>economic slow down +price rise>inflation.
 Due to political compulsion, it is clear mandate
before RBI that inflation should remain lower than
5%.
Catch 22 situation(cond.)

 Currently RBI is in dilemma regarding credit

policy because its exchange rate goals and
inflation targeting at loggerheads with each
other.
 This leaves RBI in a precarious position. The
RBI has to chose between Rs. appreciation
and inflation with each of them worse than the
other .
Dr. Reddy’s Policy Prescriptions
MONETARY POLICY REVIEW –
Jan 29/08
 No change in key policy rate
owing to continuing inflation
concerns overweighting
emphasis on growth .
 Inflation tolerance band
reduced to 4 to4.5%.
 Reddy hinted at further
policy measures to curb
capital inflows and reduce
the impact of already
intensified risk to inflation
EXPERT’S VIEWS

“ Monetary policy must accommodate primary

supply shocks and then curbs secondary effects.
The prime aim of Monetary policy should be
targeting stability.”
Raghuram C Rajam, economist

“We maintain the view that policy rates have

peaked but for several reasons do not expect the
RBI to cut policy rate at least until the
July08,quaterly policy meetings.”
India report , JP Morgan Chase
 LIST OF BOOKS
Books:
2. Economics, ICAI
3. Fundamental of Economics- A.S.Raj
4. Managerial Economics- Varshney & Maheshwari
5. Macro Economics- TMH
6. Dictionary of Economics- Jain and saakshi.
7. Indian Economy since Independence- edited by Uma
Kapila
8. Indian Economy- Dutt and Sundaram
 LIST OF PERIODICALS
 Dailies/Periodicals-
1. Economic Times
2. Hindustan Times-Business
3. Business Line
4. Dalal Street (Oct 1-14,07)
5. Business World (Sept 17,07)
6. Financial Express
7. Business Standards
8. Business and Economy(Oct 5-18)
9. The Hindu
List of Websites `
 www.rbi.gov.in
 www.livemint.com
 www.bloomberg.com
 www.timesofindia.com
 www.thehindu.com