1. Monetary
Policy
Group 5
Kapali 05
Prachi 16
Pankaj 21
Nikhil 28
Kedar 40
On Ali 52
Chandra 56

2. Macroeconomic Policies
Physical Policy
Fiscal Policy
Related to overcoming
Related to
specific problems of the
budget, government
economy
expenditure, taxation
Monetary Policy
Related to money
supply, exchange rate
control and bank rate
control

3. Fiscal Policy
Use of “Government Expenditure”, and “taxation” to manage the economy.
Purpose of Fiscal Policy
Stabilise economic growth, avoiding the boom and bust economic cycle
Variables affected by Fiscal Policy in the economy
Aggregate demand and the level of economic activity
The pattern of resource allocation
The distribution of income.

4. Physical Policy
Meant to affect only strategic points of the economy
Purpose of Physical Policy
Overcome specific problems such as pricing of particular
commodity, shortages or surpluses developing in the economy etc.
Variables affected by Physical Policy in the economy
Price and distribution of specific commodity
Investment and production
Foreign Trade

5. 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

6. Monetary Policy – RBI’s role
Demand for Money Demand for goods/services
Ensuring price
Instruments such as stability and ensuring
CRR, OMO & Bank Rate savings
Control on money Control on bank
supply, velocity of credit when prices
circulation of money rise/fall
during inflation

7. Monetary Policy – Terminology
Inflation • Inflation refers to a persistent rise in prices
Money Supply (M3) • Total volume of money circulating in the economy
• Minimum rate at which the central bank provides loans to commercial
Bank Rate banks
• Amount of money that banks must set aside with RBI against their
Cash Reserve Ratio (CRR) deposits
• Percentage of bank funds to be maintained in government and
Statutory Liquidity Ratio (SLR) approved securities
Repo Rate • Rate at which RBI lends to other banks against government securities
Reverse Repo Rate • Rate at which RBI borrows from other banks
Capital Adequacy Ratio (CAR) • Capacity of bank meeting the time liabilities and other risk
Open Market Operations (OMO) • Purchase and sale of securities in the open market

8. Current Rates
Inflation • 0.27 (New low in 30 years)
Bank Rate • 6.0%
CRR • 5.0
SLR • 24.0%
Repo Rate • 5.0%
Reverse Repo Rate • 3.5%
PLR • 12.75% – 13.25%
Re/$ • 50.95

9. Monetary Policy – Influence
Target Variables
-Inflation
Policy Variables
-Interest rate
- Money supply -Real GDP
- OMO: Liquidity conditions -Employment
- policy rates (CRR, repo etc.) -Consumption
-Savings
-Investment

10. CRR Movement
Before 1991 Result
• Government raised funds below • Complex, distorted interest rate
market rate structure
• No depth in Government Securities • Adversely affected viability and
Market profitability of banks
• Regulation of deposit rates • Transparency and norms could not be
followed strictly
• Under developed financial
markets, Less financial instruments
availability

11. CRR Movement
Rise in CRR to control liquidity,
Boost Economy after
due to Heavy Capital Inflow &
2001 Slowdown /
to curb Re Appreciation
dotcom bubble
CRR Cuts to boost
economy after
Stable CRR from CRR hikes to
Sub prime loss /
2004 to 2006 curb inflation
Global meltdown

12. Inflation Movement
CRR hikes proved to
Uncontrolled Inflation despite Inflation Down on account
Be effective
Further CRR hikes of global credit crunch
To curb Inflation
http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/

13. SLR Movement
Stable SLR from
Banks to made available more funds
1998 onwards
& More Efficiency

14. Repo and Reverse Repo rates Movement
Repo rate reduction due to make
Increased rates to control the liquidity
credit available at cheaper rates

15. Exchange Rate Movement
Sterilization to
LAF - To Control Exchange Ratio
Control rupee
– Outflow of $ from India Market
Appreciation

16. Forex Reserves Position
The Surge in Foreign Exchange Reserves
Sterilization / Selling bonds
& Buying dollars
www.rgemonitor.com/blog/economonitor/248231

17. Sterilization under MSS
Sterilization bonds under (MSS) - April 2004
Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007
www.rgemonitor.com/blog/economonitor/248231

18. Current Global Scenario
18
Global GDP -0.6%
World trade
contraction by
Tighter credit
2.8%
Recession
Estimated PPP
Global Growth
Production
0.5%
Plunge
Demand Slump
Job losses
Aggressive and unconventional measures taken by
Governments and central banks

19. Impact on India
Money and credit market
Domestic
Banks
Local
Institutions
Domestic MFs NBFC
Re $
Financial Channel

20. Challenges for RBI
20
Growth amid
Global economic slowdown

21. Limitations – Monetary Policy
21
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!!

22. Thank You