PRESENTATION

ON

AN OVERVIEW OF MONETARY POLICY

 MEANING

Monetary policy can be summarized as the Central bank’s

actions to influence the availability and cost of money and
credit in the economy.
 OBJECTIVES

 Price Stability

 Economic growth

 Exchange rate management

 Full Employment
 HOW DOES IT WORK

 consider that an economy is growing too fast. This is also referred to as

overheating of the economy: a situation that typically happens in the boom
phase when GDP (gross domestic product) growth exceeds the long-term
growth potential of the economy. The producers of goods are not able to
make enough goods to meet the rising demand. The resultant demand-
supply mismatch creates inflationary pressures in the economy. This
situation is regarded as unsustainable, as the high growth translates into
higher inflation. In this situation, the RBI raises interest rates to depress
spending and reduce the pressure on inflation.
 TOOLS

 Bank Rate:It is the rate at which RBI,Central Bank,lends money to the Commercial Banks.

 Repo Rate:It is rate at which RBI lends money to the Commercial Banks for the shorter
period of time I.e 365 days.

 Reverse Repo Rate:It is the rate at which RBI borrows money from the Commercial
Banks.

 Cash Reserve Ratio:Every scheduled commercial bank is required under law to keep with
central bank a certain proportion of their deposits in cash.

 Statutory Liquidity Ratio:It is the amount which every bank needs to maintain as a
percentage of total deposits as cash with the bank.
 Ripples in the Indian economy
 All the big economies were in recession.

 Crisis penetrated into the real economy from the financial sector.

 Crisis has spread among the EME’s through all the three channels-
financial , real and the confidence channel.

 Knock on effects of the global financial crisis-economic slowdown and the

falling commodity prices.
 Industrial production growth has slackened ,(X-M)= -ve, international credit
channels remain to be constrained.

 Inflation has decreased according to WPI, but CPI is still showing the double
figures.

 Crash of financial pillars- Lehman bros.

 Many commercial banks, investment banks, and other financial institutions suffered
huge loss.

 Global real GDP growth on a PPP basis , is projected to decelerate from 3.7 to
2.2% in 2008 and further to 1.1 in 2009.
 Ripples in the Agricultural and
Industrial sector

 Domestic outlook- real GDP growth has declined from 9.3 to 7.8%.

 Agriculture production during the 2008-2009 was considered to be

better than the previous year.

 Industry growth- IIP growth decelerated to 3.9% from 9.2%.

 Corporate performance-despite high topline growth the operating

margins of the private corporate sector were eroded by higher input
costs.
Fiscal view of the monetary developments
 Fiscal scenario-both tax and non tax revenue receipts of the central
government for the period april-Nov 2008 were lower .

 Fiscal deficit from the budget estimate has increased to 5.9% of GDP from
2.5%.

 Reduction in CRR (5.5 to 5%)- 3 related effects-reduces reserve money in

banks, money multiplier rises, money supply increases.

 Reduction in SLR from 25 % to 24%

 Bank deposit and lending rates decreased.

 Reserves

 Depreciation in the value of rupee.

 External sector - BoP in the first half of 2008-2009in comparison with the
corresponding period of the previous year due to large trade deficit.

 Foreign reserve of dollar in India declined to $252.2 billion from $286.3.

 Credibility

 Despite the expansion in bank credit, there was a perception of lack of credit
availability. This could be attributed to reduced flow of funds from non-bank sources,
notably the capital market and external commercial borrowings.

 During 2008-09 so far, the total flow of resources to the commercial sector from
banks and other sources was marginally lower than in the previous year reflecting
contraction of funds.

 Equity markets weakened sharply till end-October 2008 in tandem with global stock
markets, particularly Asian markets, reflecting further deterioration in the global
financial market sentiment, FII outflows, slowdown in industrial growth and lower
corporate profits

 The BSE Sensex declined from an all-time high of 20873 on January 8, 2008 to a low
of 8451 on November 20, 2008. The equity market has since remained generally
range-bound; the BSE Sensex was at 8674 on January 23, 2009.
 Overall view of the quarter
Although the crisis has been a severe one but still the financial market in india is
sustainably stable as compared to there foreign counterparts.

India’s banking system remains healthy, well-capitalised, resilient and profitable.

Credit markets are functioning well.

Lack of globalization also helped India in keeping themselves away from the global
crisis, since its growth was mostly due to its domestic consumption.

Easy liquidity and low interest rates helped India in fighting the war of crisis.

However India s exports and investments have become slow.

 Counter measures taken by RBI
In order to diminish the ripples of the global crisis on India, RBI took following measures

OCT2008.
 The CRR was reduced by 250 basis points from 9.0 per cent to 6.5 per cent effective from the
fortnight beginning October 11, 2008.

 A 14-day special repo facility for a notified amount of Rs.20,000 crore was instituted to alleviate
liquidity stress faced by mutual funds,

 Commercial banks and all-India term lending and refinancing institutions were allowed to lend
against and buy back certificates of deposit (CDs) held by mutual funds

 The Reserve Bank temporarily provided a sum of Rs.25,000 crore as the first installment under the
Agricultural Debt Waiver and Debt Relief Scheme to scheduled banks and NABARD immediately,
pending Parliamentary sanction and consequent release of funds by the Central Government.
 Global financial conditions remain uncertain and unsettled.
Nov,2008
 Globally, commodity prices, including crude, began to abate which reduced domestic
inflationary pressures. On the growth front, it was important to ensure that credit requirements
for productive purposes were adequately met so as to support the growth momentum of the
economy. Accordingly, the following measures were taken on November 1, 2008:

 The Repo rate was reduced by 50 basis points to 7.5 per cent with effect from November 3,
2008.

 The CRR was reduced by 100 basis points from 6.5 per cent to 5.5 per cent.

 The statutory liquidity ratio (SLR), which was relaxed on a temporary basis earlier, was made
permanent and reduced to 24 per cent effective November 8, 2008.

 On November 7, 2008 forex swap facility made available to foreign branches of Indian
subsidiaries.
 Housing finance companies (HFCs) registered with the National Housing
Bank (NHB) were permitted to raise short-term foreign currency borrowings
under the approval route.

 The Reserve Bank permitted Indian corporates to prematurely buy back

their FCCBs at prevailing discounted rates.

 Banks were encouraged to use the special refinance facility under Section
17(3B) of the Reserve Bank of India Act, 1934 for the purpose of lending to
micro and small enterprise
 December 2008
 To improve the credit flow to productive sectors at viable costs so as to sustain the
growth momentum, the Reserve Bank took the following measures on December 6
and 11, 2008:

 The Repo rate was reduced by 100 basis points from 7.5 per cent to 6.5 per cent
and the reverse Repo rate by 100 basis points from 6.0 per cent to 5.0 per cent,
effective December 8, 2008.

 A refinance facility was introduced for SIDBI, NHB and EXIM Bank for Rs. 7,000
crore, Rs.4,000 crore and Rs.5,000 crore respectively. This facility will be available
up to March 31, 2010.

 Loans granted by banks to HFCs for on-lending for housing up to Rs.20 lakh per
dwelling unit were classified under priority sector.
 January 2009
 In order to stimulate growth, the Reserve Bank took the following further
measures on January 2, 2009:

 The Repo rate was reduced by 100 basis points from 6.5 per cent to 5.5 per
cent with effect from January 5, 2009.

 The reverse Repo rate was reduced by 100 basis points from 5.0 per cent to
4.0 per cent with effect from January 5, 2009.

 The reverse Repo rate was reduced by 100 basis points from 5.0 per cent
to 4.0 per cent with effect from January 5, 2009.

 The CRR was reduced from 5.5 per cent to 5.0 per cent of NDTL effective
from the fortnight beginning January 17, 2009.
 Projected impacts of the effects
 1,60,000 crores of primary liquidity released in the market.

 potential liquidity has been made available through various refinance

facilities for banks and financial institutions to the tune of Rs.80,000 crore.

 Repo facility gives an additional potential liquidity of Rs.60,000 crore.

 The SPV for NBFC will augment potential liquidity by another Rs.25,000
crore.

 permanent reduction in SLR by 1.0 per cent has made available liquid funds
of the order of Rs.40,000 crore for the purpose of credit expansion
 Growth Projection

 Keeping in view the slowdown in industry and services and with the
assumption of normal agricultural production, the projection of overall real
GDP growth for 2008-09 is revised downwards to 7.0 per cent with a
downward bias.
 Inflation Projection

 Inflation in terms of WPI is already below 7 % as projected while inflation on

account of primary articles still remains at the double digit level, reflecting
sustained price pressures, particularly on food articles.

 Keeping in view the global trend in commodity prices and the domestic
demand-supply balance, WPI inflation is now projected to decelerate to
below 3.0 per cent by end-March 2009.
 Monetary Projection
 The Reserve Bank is committed to provide adequate liquidity for all
productive activities on a continuous basis.

 the aggregate deposit growth for 2008-09 is revised to 19.0 per cent from
17.0 per cent earlier.

 The projection of growth of adjusted non-food credit, including investment in

bonds/debentures/shares of public sector undertakings and private
corporate sector and CP, for 2008-09 is revised to 24.0 per cent from 20.0
per cent earlier
 Overall assessment
 As an integral part of a globalizing world, India cannot be expected to remain
immune to a global crisis of this nature and magnitude; and in responding to the
crisis, India has to share the uncertainty on the way forward just like the rest of the
world.

 to sustain the growth momentum- lowering of the interest rate structure by

reducing both its key policy rates the Repo rate and the reverse Repo rate.

 The SLR has also been reduced by one percentage point releasing funds to banks
for credit deployment.

 In order to maintain liquidity RBI has taken key initiatives and has fused liquidity
worth Rs.3,88,00 crore.