monetary policy in india

7/29/2019 Monetary Policy in India

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Monetary Policy in India


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Introduction Established under the Reserve Bank of

India Act, 1934 on April 1, 1935

Initially, a private shareholders' bankwith capital of Rs. 5 crore

Nationalised in 1949

Central Board of Directors 20members

Four Local Boards 5 members each


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Major Functions of RBI Monetary Policy Function

Supervision and Regulation Function

Payment System Policy and OversightFunction

Management of forex reserves, including gold

Issue of Currency Function Banker to banks and Lender of Last Resort

Management of Government Debt Function

Banker to Government


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Monetary Policy Monetary policy refers to the use of

instruments under the control of the

central bank to regulate theavailability, cost and use of moneyand credit with the aim of achieving

optimum levels of output andemployment, price stability, balance ofpayments equilibrium, and any other

goal set by the state.


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Preamble of the RBI Act, 1934 Preamble of the Act: 'to regulate the issue of

Bank notes and keeping of reserves with a

view to securing monetary stability in Indiaand generally, to operate the currency andcredit system of the country to its advantage'.

No explicit mandate for price-stability or

formal inflation targeting

Evolved to include macro-economic andfinancial stability


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Monetary Policy in India Monetary Policy Framework

Features of Monetary Policy


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Monetary PolicyFramework.

Objectives

Maintaining Price Stability

Ensuring availability of adequate creditto support growth

Maintaining financial stability

Relative emphasis modulated as per theprevailing circumstances

Articulated in the policy statements


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Monetary Policy

Framework... Monetary Targeting Approach (till 1997-98)

Multiple Indicator Approach (from 1998-99) -Money Supply, Interest Rates, Credit,Exchange Rate, Inflation Rate, Fiscal Position,Trade & Capital Flows, Real OutputDevelopments.

Operating Target - Switch from ReserveMoney to Overnight Interest Rate

Market-based Exchange Rate Management


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Monetary Policy

Framework...Multiple Indicator ApproachJuxtaposing

High-frequency data Interest rates/rates infinancial markets

Medium-frequency data Currency, Inflationrate, Money Supply, Credit, other banking

data Low-frequency data - Fiscal position, Trade &

Capital Flows, Real Output Developments.


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Monetary Policy

Framework... Instruments

- Direct- Cash Reserve Ratio (CRR)

- Statutory Liquidity Ratio- Direct Credit Controls- Refinance

- Indirect Open Market Operations (OMO)

- Outright Sales/Purchase- Repo Operations as under Liquidity Adjustment Facility (LAF)--Market Stabilisation Scheme (MSS)

- Interest Rates (Bank Rate)


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Monetary Policy

Framework Operating Procedure: Shift from Direct to Indirect Instruments Reduction in Sector-specific Refinancing and

CRR/SLR Recent Changes Liquidity Adjustment Facility (LAF) since June 2000 OMOs Role of Bank Rate Sterilisation Operations Market Stabilisation

Scheme since 2004 Exchange rate operations with emphasis on

reserves adequacy


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Behaviour of Daily Call, Repo, CBLO Rates

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Chart:Behaviour of Call, Repo, Reverse Repo & CBLO

Call Rate* Repo Rev. Repo


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Liquidity Management

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Net LAF MSS GOI Cash Balances Call Rate


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Features of MonetaryPolicy

A Technical Advisory Committee constituted in July2005 to advise Reserve Bank on Monetary Policy.

Till 2004-05: Announced Twice by RBI

- April May: Annual Policy- October November: Mid-term Review

From 2005-06: Additional Quarterly Reviews in Julyand January.

Annual Policy & Mid-term Review presented in themeeting with bankers and Quarterly reviews releasedto the Press till 2008.

From January 2009: Quarterly Reviews presented inthe meeting with bankers.

Dates are being pre-announced since 2005-06.


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Institutional Framework

- Formulation Stage Inter-departmental Working Groups Inter-agency Committees Technical Advisory Committee on Monetary Policy

- Implementation Process Monetary Policy Strategy Group Financial Markets Committee (FMC)



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Structure of Monetary Policy Announcements

Part I- Macroeconomic and Monetary Developments- Stance of Monetary Policy

- Monetary Measures

Part II- Developmental and Regulatory Policies (only in

Annual Policy & Mid-term Review)

All the monetary policy documents are accompanied by a technicaland analytical review of macroeconomic and monetarydevelopments, issued as a separate document on the previous

day.


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monetary policy in india

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