HOW WOULD A STRINGENT MONETARY POLICY IMPACT INVESTMENT DECISIONS ?

How is it useful for a retail banker ?

NAME ID NUMBER

BHAVANA E130031000126

AJITH E130031000142

HIMAJA E130031000134

Batch Code : HYD01AA0213Faculty: Vishwanathan Ramakrishnan

Date : 30 October 2013

Contents

S.No Description

1 Introduction To Monetary Policy

2 Stringent Monetary Policy

3 Characteristics

4 Objective

5 Types of Monetary Policy

6 Factors Affecting Monetary Policy

7 Instruments

8 Impact on Investment Decision

9 Current Monetary Policy

10 Investments Options

11 Inferences

Monetary policy is the process by which the monetary authority of a country controls the supply of money

It is release twice an year

Slack season policy April - September

Busy Season policy October- March

Stringent Monetary policy means low liquidity in the markets which basically means interest rates are relatively higher

Stringent Monetary Policy

Key changes in Bank Rate Rise in OMO Increase in SLR Increase in CRR Increase In RBI & bank lending

policies

Characteristics

Maintaining price stability

Infusion of adequate Credit to productive

sectors.

Full employment

Balance of payments equilibrium

Neutrality of money

Equal income distribution

Objectives

Inflation targeting: Objective is to keep inflation under control, such as Consumer Price Index, within a desired range

Price level targeting : Is similar to inflation targeting .It actually takes past years into account.Monetary aggregates : To mainly control the amount of money in circulation.

Types of Monetary Policy

Fixed exchange rate : The government declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate .Gold standard : Price of the national currency is measured in units of gold bars. It is kept constant by buying or selling gold at a fixed

price in terms of the base currency

Cont…

• Money not appealing in the Economy• Existence of Unorganized Financial Market

Factors Affecting Monetary Policy

Instruments of Monetary Policy Bank Rate Statutory Liquidity Ratio Open Market Operations Cash Reserve Ratio Repurchase Auction Rate(Repo) and Reverse

Repurchase Auction Rate (Reverse Repo) Margin Requirement Credit Ceiling Direct Action Moral Persuasion

Impact on Investment Decisions

On Economyo When Restrictiveo When Accommodative

Accommodative Monetary Policy:Cash is not king, as investors prefer to deploy their money anywhere rather than parking it in deposits that provide minimal returns

Restrictive Monetary Policy: Cash tends to do well here, since higher deposit rates induce consumers to save rather than spend

Essential things to note for a Banker on Monetary Policy

• Key changes in Interest rates will affect the Lending policy.

(per cent)

Effective since Reverse Repo Rate Repo Rate

Marginal Standing Facility@

Cash Reserve Ratio*

Statutory Liquidity

Ratio*1 2 3 4 5 6

May 03, 2011 6.25 (+0.50) 7.25 (+0.50) 8.25 (+0.50) 6.00 24

June 16, 2011 6.50 (+0.25) 7.50 (+0.25) 8.50 (+0.25) 6.00 24

July 26, 2011 7.00 (+0.50) 8.00 (+0.50) 9.00 (+0.50) 6.00 24

September 16, 2011 7.25 (+0.25) 8.25 (+0.25) 9.25 (+0.25) 6.00 24

October 25, 2011 7.50 (+0.25) 8.50 (+0.25) 9.50 (+0.25) 6.00 24

January 28, 2012 7.50 8.50 9.50 5.50 (-0.50) 24

March 10, 2012 7.50 8.50 9.50 4.75 (-0.75) 24

August 11, 2012 7.00 8.00 9.00 4.75 23 (-1.00)

September 22, 2012 7.00 8.00 9.00 4.50 (-0.25) 23

January 29, 2013 6.75 (-0.25) 7.75 (-0.25) 8.75 (-0.25) 4.25 23

February 09, 2013 6.75 7.75 8.75 4.00 (-0.25) 23

March 19, 2013 6.50 (-0.25) 7.50 (-0.25) 8.50 (-0.25) 4.00 23

May 03, 2013 6.25 (-0.25) 7.25 (-0.25) 8.25 (-0.25) 4.00 23

July 15, 2013 6.25 7.25 10.25 (+2.00) 4.00 23

0ct 29,2013 6.75 7.75 8.75 4.00 23

*: Per cent of net demand and time liabilities. @: With effect from Feb 13, 2012 Bank Rate was aligned to MSF rate. Note: Figures in parentheses indicate changes in percentage points.

Current monetary policy

Why & Why Not in… Equities Real Estates Mutual Funds Government Bonds

Investment Options

It can have significant impact on every asset class

Awareness of monetary policy, helps to position the portfolios to benefit from policy changes and boost returns

Inferences

Rbi.org.inWikipediaInvestopediaEconomic timesYoutubeFinancial expressInvestorwords.com

Bibliography

Queries ?

Thank You