monetary policy & its impact

7/29/2019 Monetary Policy & its Impact

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Submitted byGroup 1

Aman Sachdev (12DM 016) Anuj Pasricha (12DM 030)

Amit Mantry (12DM 019) Arnav Shankar (12DM 035)

Ankit Sood (12DM 024) Asif Ali (12DM 040)


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MONETARY POLICY

Objectives

Price Stability

Controlled Expansion of Bank Credit

Desired Distribution of Credit

Equitable Distribution of Credit

Promote Efficiency

Reduce Rigidity

Restriction of Inventories


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Monetary Tools

Open Market Operations

Cash Reserve Ratio

Statutory Liquidity Ratio


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Bank Rate

Repo Rate and Reverse Repo Rate


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MONETARY POLICY 2009-2010

Economic Scenario Exceptionally challenging circumstances - Crash of Lehman Brothers

Focus on minimising impact

Policy shifted to monetary easing

Economic activity slowed during Q1 and Q2 of 2008-2009 as compared

with over 9% in the previous year

Sharp fall in Q3

Growth during the first three quarters of 2008-2009 - 6.9% compared to

9% during the previous year GDP Growth 2008-2009 6.7%


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Table 1: Real GDP Growth (%)

Q1 Q2 Q3 April-December

Sector (April-June) (July-September) (October-December)

2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09

Agriculture 4.4 3.0 4.4 2.7 6.9 -2.2 5.5 0.6

Industry 8.5 5.2 7.5 4.7 7.6 0.8 7.9 3.5

Services 10.7 10.2 10.7 9.6 10.1 9.5 10.5 9.7

Overall 9.1 7.9 9.1 7.6 8.9 5.3 9.0 6.9

Source: Central Statistical Organisation (CSO).

0

1

2

3

4

5

6

7

8

9

Q1 2008 Q2 2008 Q3 2008 Q4 2008

GDP Growth Rate

GDP Groth Rate


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Wholesale Price Index (WPI), decelerated sharply from 12.91 per cent on

August 2, 2008 to 0.26 per cent by March 28, 2009.

Table 2 : Annual Inflation Rate (%)

Wholesale Price Index (WPI) 29-Mar-08 28-Mar-09

(y-o-y) (y-o-y)

WPI - All Commodities 7.75 0.26

WPI - Primary Articles 9.68 3.46

WPI - Food Articles 6.54 6.31

WPI - Fuel Group 6.78 -6.11

WPI - Manufactured Products 7.34 1.42

WPI - Manufactured Food Products 9.40 7.51

WPI - Excluding Fuel 8.01 2.01

WPI - Excluding Food Articles and Fuel 8.38 0.95


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Response to the slowdown since mid - September 2008 Repo Rate cut by 400

basis points and Reverse Repo by 250 basis points

CRR reduced by 400 basis points

In response to the action by RBI banks reduced their deposit and lending rates


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Reduction in the range of term deposit rates between October 2008 - April

18, 2009 - 125-250 basis points by public sector banks

75-200 basis points by private sector banks

100-200 basis points by five major foreign banks

Reduction in CRR Reduces Reserve Money

Money Multiplier Rises

M3 expands with a lag


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Table 5: Annual Variations in Monetary Aggregates

(Per cent)

Item Annual Variations

2007-08 2008-09

Reserve Money 31.0 6.4

Money Supply (M3) 21.2 18.4

M3 (Policy Projection) 17.0-17.5* 19.0**

Money Multiplier 4.33 4.82

*Policy projection for the financial year as indicated in the Annual Policy Statement 2008-09 (April 2008).

**Policy projection for the financial year as indicated in the Third Quarter Review of Monetary Policy

2008-09 (January 2009).

Reserve Bank Actions since mid Sep 2008 - liquidity of over Rs.4,22,000

40000 Cr for credit expansion

Growth in non-food bank credit (year-on-year basis) decelerated from a peak of 29.4

per cent in October 2008 to 17.5 per cent by March 2009.


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STANCE

Measures since mid September 2008 Repo rate was reduced by 400 basis points from 9.0 per cent to 5.0 per

cent

Reverse repo rate was reduced by 250 basis points from 6.0 per cent to

3.5 per cent.

The cash reserve ratio (CRR) was reduced by 400 basis points from 9.0

per cent to 5.0 per cent.

The statutory liquidity ratio (SLR) was reduced from 25.0 per cent of to

24.0 per cent.


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ASSESMENT

The global financial and economic outlook continues to be unsettled and

uncertain

Assessment by major international agencies projected sharp contraction

in global trade volumes in 2009

The assessments projected little chance of global economic recovery in2009.

Therefore the Reserve Bank will continue to maintain vigil, monitor

domestic and global developments, and take swift and effective action to

minimise the impact of the crisis and restore the economy to a high

growth path consistent with price and financial stability.


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MONETARY MEASURES 2009-2010

Unchanged at 6%

To reduce the repo rate by 25 basis points from 5.0 per cent to 4.75 per

cent.

To reduce the reverse repo rate under by 25 basis points from 3.5 per

cent to 3.25 per cent with immediate effect. The cash reserve ratio (CRR) was retained unchanged at 5.0.

Reserve Bank indicated its intention to purchase government securities

under open market operations (OMO) for an indicative amount of Rs.80,

000 crore during the first half of 2009-10.


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Impact

Economy was on the track of recovery, the GDP growth rate was

estimated to be between 7.2% to 7.5% for 2009-2010 as against 6.7% for

the year 2008-2009.

0

1

2

3

4

5

6

7

8

9

10

2007-08 2008-09 2009-10

GDP Growth Rate

GDP Growth Rate

The monetary measures initiated in the wake of the global financial crisis played

an important role, first in mitigating the adverse impact from contagion and then in

ensuring that the economy recovered quickly.


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Wholesale Price Index (WPI), accelerated to 9.9 per cent in March 2010,

exceeding the Reserve Banks baseline projection of 8.5 per cent for

March 2010.

0

2

4

6

8

10

12

March08 March09 March10

WPI

WPI

Monetary aggregate growth was as per the projections.

Non-food credit growth recovered from its intra-year low of 10.3 per cent in

October 2009 to 16.9 per cent by March 2010


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Monetary Policy 2010-2011

Economic Scenario Set against complex economic backdrop

EMEs significantly ahead on the recovery curve

Indias growth-inflation dynamics were in contrast to the overall global

scenario

Inflationary pressures: triggered by supply side factors.


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GDP -7.4 %

IIP growth rates

In December 2009 IIP growth rate was 17.6%

In January 2010 IIP growth rate was 16.7%

In February 2010 IIP growth rate was15.1

Month IIP

Dec-09 17.6

Jan-10 16.7

Feb-10 15.10

5

10

15

20

Dec-09 Jan-10 Feb-10

IIP


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Imports expanded

In November 2009 import expanded by 2.6%

In November 2009 import expanded by 32.4 %

In January 2010 import expanded by 35.5%

In February 2010 import expanded by 66.4%

Month Import

Nov-09 2.6

Dec-09 32.4

Jan-10 35.5

Feb-10 66.40

10

20

30

40

50

60

70

Nov-09 Dec-09 Jan-10 Feb-10

Import


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Projected GDP

Projected Inflation


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Liquidity Condition:

Surplus

Bank absorbed Rs.1,00,000 crore up to Feb 12 2010

Credit Condition:

Non-food credit grew: Oct 2009 10.3%March 2010 16.9%

Total flow of financial resources from banks, domestic non-bank and

external sources to the commercial sector during 2009-10 at

Rs.9,71,000 crore (Rs.8,34,000 crore the previous year) Monetary Aggregates

Money supply (M3) decelerated from 20.0 per cent to 16.4 per cent

(Feb 2010) then increased to 16.7 per cent.


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SLR set to its pre crisis level in Oct 2009

CRR increase by 75 basis point in Jan 2010

Due to continues increase in inflation, Repo and Reverse Repo

increased by 25 basis points each

Policy stance for 2010-11 was guided by the following major

considerations: Recovery was consolidating- quick rebound of growth during 2009-10

despite failure of monsoon rainfall suggested that the Indian economy

had become resilient and because of this pprojected growth rate of

2010-11 was higher than 2009-10.

Second, inflationary pressures had accentuated in the recent period

STANCE


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Bank Rate : 6 percent

Repo Rate : 5 to 5.25 percent

Reverse Repo Rate : 3.25 to 3.75 percent

CRR : 5.75 to 6 percent

Expected Outcomes Contained inflation

Sustained recovery

Government borrowing requirements and the private credit demand will be

met

Policy instruments will be further aligned in a manner consistent with the

evolving state of the economy.

MEASURES


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Impact

The economy continued with the momentum of late 2010, the economy wasestimated to grow by 8.6% during 2010-2011

In line with the monetary policy the year began with a tight liquidity condition.

Growth slowed despite a significant increase in reserve money

The monetary policy was not able to control inflation, the rising commodity prices

caused inflation to grow.

6.2

6.4

6.6

6.8

7

7.2

7.4

7.6

7.8

8

8.2

2008 2009 2010

GDP growth rate


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Monetary Policy 2011-2012

Main goal was to facilitate recovery in the phase of global uncertainty

Control supply side inflation, driven by food products

Major concerns for monetary policy 2011-12

Rising global commodity price

Moderation in demand

Core inflation was overshot


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Projected GDP RATE & INFLATION

RATE


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Economic Scenario

Economy was expected to grow at 8.6% in 2010-2011(with confidencelevel of 90%).

Inflation- divided in three periods

First period (April to July)- 3.5% increase in WPI largely by food item, fuel,

power group

Second period (August to November)-1.8% increase in WPI largely by food

and non-food primary articles and minerals

Third period (December to March)-3.4% increase in WPI largely by fuel

and power group and non-food manufactured products

International petroleum prices were increasing which increased the price

of domestic product.

Input cost was rising as a result the price of manufactured goods increased


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Effective lending rates- increase from 9.7 per cent in 2010-11 to 10.3 per

cent in 2011-12

Increased Base Rates by 50-165 basis points between October 2010 to

March 2011

Broad money (M3) growth was at 15.9% which was below the

expectations of RBI i.e. 17%- slow deposit growth and acceleration in

currency growth

Liquidity conditions transited to a deficit mode towards end-May 2010.

Reason: government built up cash reserve from spectrum auction which

fell down this year.

Liquidity conditions became even tighter in October 2010-

above-normal build up in government cash balances

high currency demand growth and credit growth outpacing deposit


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STEPS TAKEN Temporary waiver of penal interest for any shortfall in maintenance of

statutory liquidity ratio (SLR)

Reduction in the SLR by one per cent

Conducting open market operations


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Stance Since 2009 the cash reserve ratio (CRR) has been raised by 100 basis

points.

Policy rates were raised by 8 time, repo rate by 200 basis points and thereverse repo rate by 250 basis points.

DRIVING FORCES Inflation which remained much above the comfort level of the Reserve Bank.

Sharp increase in non-food manufactured product inflation

Uncertainty in global commodity prices which posed a major risk to domesticinflation

Maintain an interest rate environment that moderates inflation and anchorsinflation expectations.

Foster an environment of price stability that is conducive to sustaining growth in

the medium-term coupled with financial stability. Manage liquidity to ensure that it remains broadly in balance, with neither a large

surplus diluting monetary transmission nor a large deficit choking off fund flows.


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Monetary Measures

Repo Rate was increased from 6.75 % to 7.25%

Reverse Repo Rate was adjusts to 6.25%

Bank Rate-retained at 6.0 per cent.

Cash Reserve Ratio of Scheduled Banks was retained at 6.0%


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Expected results

Contain inflation by reining in demand side pressures, and anchor

inflationary expectations; and

Sustain the growth in the medium-term by containing inflation.


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Impact GDP growth during April-December 2011 slowed significantly to 6.9 per cent

from 8.1 per cent in the corresponding period of the previous year, this was

not only in response to the tight monetary policy but also because of globalchallenges

Wholesale price index (WPI) inflation, which remained above 9 per cent duringApril-November 2011, moderated to 6.9 per cent by end-March2012wholesale price index (WPI) inflation

Money supply (M3) growth, which was 17 per cent at the beginning of thefinancial year 2011-12, reflecting strong growth in time deposits, moderatedduring the course of the year to about 13 per cent by end-March 2012, lowerthan the Reserve Banks indicative trajectory of 15.5 per cent, mirroringtightness in primary liquidity.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

March2010 March2011 March2012

Inflation Rate

Inflation Rate

monetary policy & its impact

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