Monetary Policy of last 5 years

Presented by: Group - 7

Piyush ChitlangiaSneha MaskaraVaibhav GargAnkita KaushalAnsul DubeyAbhinav AdarshRuchi RathoreMalvika SinghSatyam Jaiswal13098 13170 13190 13026 13030 13002 13134 13078 13146

FLOW OF PRESENTATION
1. Macroeconomic Policies 2. Meaning & Objectives of Monetary Policy 3. Monetary Policy Terminology 4. Current Rates 2012 5. Monetary Policy Influence 6. CRR and its Movement last 5 years 7. Inflation and its Movement last 5 years 8.SLR and its Movement last 5 years 9. Reverse Repo Rate and its Movement last 5 years 10. Repo Rate and its Movement last 5 years 11. Challenges of RBI 12. Limitation of Monetary Policy

Macroeconomic Policies
Fiscal Policy
Related to budget, government expenditure, taxation

Monetary Policy

Related to money supply, exchange rate control and bank rate control

Monetary Policy
Regulation of supply of Money and Cost and Availability of Credit in the economy Purpose of Monetary Policy Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth

Variables affected by Monetary Policy in the economy Interest Rates Liquidity Credit Availability Exchange Rates

Objectives of Monetary Policy

General objectives of Central banks -> price stability, currency stability, financial stability, growth in employment and income. The major objectives of monetary policy in India-> price stability , ensuring adequate flow of credit to the productive sectors of the economy and financial stability. Communicated to the public through an annual policy statement in April and a mid-term review in October. The Monetary Policy regulates the supply of money and the cost & availability of credit in the economy. It also deals with both the lending and borrowing rates of interest for commercial banks.

Monetary Policy RBIs role

Demand for Money

Demand for goods/services

Instruments such as CRR, OMO & Bank Rate

Ensuring price stability and ensuring savings

Control on money supply, velocity of circulation of money during inflation

Control on bank credit when prices rise/fall

Monetary Policy Terminology

Inflation Money Supply (M3) Bank Rate Cash Reserve Ratio (CRR)
Inflation refers to a persistent rise in prices Total volume of money circulating in the economy Minimum rate at which the central bank provides loans to commercial banks Amount of money that banks must set aside with RBI against their deposits Percentage of bank funds to be maintained in government and approved securities Rate at which RBI lends to other banks against government securities Rate at which RBI borrows from other banks

Statutory Liquidity Ratio (SLR)

Repo Rate Reverse Repo Rate Capital Adequacy Ratio (CAR) Open Market Operations (OMO)

Capacity of bank meeting the time liabilities and other risk

Purchase and sale of securities in the open market

Current Rates 2012

Inflation Bank Rate CRR SLR Repo Rate

7.45%

9% 4.75 %
23 % (w.e.f. 11/08/12) 8%

Reverse Repo Rate 7 % Re/$

55.71

Monetary Policy Influence

Target Variables

Policy Variables - Money supply - OMO: Liquidity conditions - policy rates (CRR, repo etc.)

-Inflation -Interest rate -Real GDP -Employment -Consumption

-Savings
-Investment

WHAT IS CRR ??
CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits with the RBI . This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.

CRR Movement
10 9 8 7

6
5 4 3 2 1 0 CRR Rate

RATES OF CRR LAST 5 YEARS

Date 10/03/2012 28/01/2012 24/04/2010 27/02/2010 13/02/2010 17/01/2009 08/11/2008 01/11/2008 15/10/2008 11/10/2008 30/08/2008 19/07/2008 05/07/2008 24/05/2008 10/05/2008 26/04/2008 Rate 4.75 5.5 6 5.75 5.5 5 5.5 6 6.5 7.5 9 8.75 8.5 8.25 8 7.75

What is Inflation ?
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate .When Prices rise the Value of Money falls.

Stages of Inflation
1. CREEPING INFLATION 2. WALKING INFLATION 3. GALLOPING INFLATION 4. HYPER INFLATION (2% -3 %) ( 8% - 12%) (15% - 30 %) ( 30 % abv)

Inflation Movement

What is SLR ?
Banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements . If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy.

22.5 23 24

23.5

24.5

25.5

22 01/11/2008 01/02/2009 01/05/2009 01/08/2009 01/11/2009

25

01/02/2010
01/05/2010 01/08/2010 01/11/2010

01/02/2011
01/05/2011 01/08/2011 01/11/2011 01/02/2012 01/05/2012 01/08/2012 SLR Rate

SLR Movement

SLR Rates
Date Rate

11/08/2012
18/12/2010 07/11/2009 08/11/2008

23
24 25 24

What is Reverse Repo Rate ?

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

Reverse Repo Rate

8 7 6 5 4 3 2 1 0 Reverse Repo Rate

Reverse Repo rates Movement

Date 17/04/2012 25/11/2011 16/06/2011 25/01/2011 02/11/2010 27/07/2010 20/04/2010 21/04/2009 04/03/2009 08/12/2008 Rate 7 7.5 6.5 5.5 5.25 4.5 3.75 3.25 3.5 5

What is Repo rate ?

The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.

10

0 17/04/2012 25/10/2011 16/09/2011 26/07/2011 17/03/2011

1 Repo Rate

25/01/2011
2/11/2010 16/09/2010 2/7/2010 20/04/2010 19/03/2010 4/3/2009 2/1/2009 8/12/2008

Repo Rate

20/10/2008
29/07/2008 11/6/2008

Repo Rate Repo Rate last 5 years

Date 17/04/2012 25/10/2011 16/09/2011 26/07/2011 17/03/2011 25/01/2011 02/11/2010 16/09/2010 02/07/2010 20/04/2010 19/03/2010 04/03/2009 02/01/2009 08/12/2008 20/10/2008 29/07/2008 11/06/2008 Rate 8 8.5 8.25 8 6.75 6.50 6.25 6.00 5.50 5.25 5.00 5.00 5.50 6.50 8.00 9.00 8.00

last 5 years

26

Challenges for RBI

Global economic slowdown

27

Limitations Monetary Policy

Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation Monetary policy is restricted by the impact of other government actions, especially Fiscal policy, i.e. decisions about government expenditures and taxation
Problems of an inflexible labour market, inadequate infrastructure and, most important, fiscal policy whose discipline is open to question limits the effectiveness of the Monetary policy

Monetary Policy cannot work in isolation!!

Thank You