The document discusses the RBI's monetary policy stance and tools. It notes that over the last 10 years, the RBI has alternated between monetary easing and tightening phases in response to inflation and growth trends. Currently, the RBI has raised interest rates in recent months but inflation remains high due to external factors like fuel prices and a falling rupee. While tightening was intended to curb inflation, forecasters have revised GDP growth estimates downward, suggesting the current approach may not be effective given the nature of inflation pressures.

1. RBI- MONETARY
EASING/TIGHTENING
IN NEXT REVIEW?
SRAVANI KARRI
BHAGIRATH M P
NIKHAR KEDIA
SAURAV MISHRA

2. Changes in monetary stance (last 10-year period)




Phase I of 5 years of 2003-08 of high growth but rising inflation concern
towards the later part of the period when repo rate was raised from 6 per cent
to 9 per cent and the cash reserve ratio (CRR) was raised from 4.5 per cent to 9
per cent.
Phase II of 2 years of 2008-10 following the global financial crisis when
the repo rate was reduced from 9 per cent to 5.25 per cent and CRR was
reduced from 9 per cent to 5.75 per cent.
Phase III of 2 years of 2010-12 of monetary tightening responding to
rising inflation when policy rate was raised from 5.25 per cent to 8.5 per cent
but CRR was reduced to 5.5 per cent.
Phase IV of over a year of monetary easing in 2012-13 and 2013-14 so far
with the repo rate reduced to 7.25 per cent and CRR lowered to 4.0 per cent;
though since mid-July 2013, the RBI has tightened the monetary and liquidity
conditions without changing the policy repo rate and CRR to address exchange
market volatility.

3. Tools of Monetary Policy

Bank rate: Rate at which RBI allows finance to commercial banks

CRR: Maintaining a daily cash reserve equivalent with RBI. Used to impound excess
liquidity or release funds into the economy

SLR: Minimum portion of Net Demand and time liabilities in form of cash, gold, etc. as
liquid assets, in addition to cash reserve requirements

Repo/ Reverse-Repo rate:

Repo rate is the rate at which the RBI lends money to commercial banks in the event of
any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Reverse repo rate is the rate at which theRBI borrows money from commercial banks
within the country. It is a monetary policy instrument which can be used to control the
money supply in the country.

Open market operations : Involves buying and selling of govt. securities by RBI to
influence volumes of cash reserves .

4. Monetary Easing
Used by central bank to stimulate the economy when standard economic policy has
become ineffective
How is it done?
Buying financial assets (eg. bonds) from commercial banks via open market
operations
Purpose?
Flood them with reserves (cash in the vault) in hopes that they will lend it out and
start a virtuous cycle of investment and consumption.
Aimed at: Price levels (Inflation),Liquidity conditions(Policy rates reduced), CAD (less
monetary easing)
Cut in CRR, Repo rate, MSF
Policy rate measures’ Lag time:
Inflation: 3-4 quarters
Growth : 2-3 quarters

5. Monetary Tightening

Monetary Tightening: In order to control or reduce the inflation in a country,
the central bank may use some monetary policies. This is called Monetary
Tightening

Reserve Bank of India often does this by increasing interest rates which might
result into decrease in Liquidity.

When the Liquidity decreases and the demand for money decreases which
might result in lower inflation

However this is not the case in present scenario

6. GDP in India
Components
of GDP
Services
~60%
Manufacturing
~25%
Agriculture
~15%
GDP growth numbers
Comments
Time Period
GDP growth
2004-05 to 2010-11
8.5%
-
2008-09
6.7%
Global financial crises
2009-10
8.6%
2010-11
9.3%
2011-12
6.2%
Euro crises, slump in world economy
2012-13
5.0%
Domestic policy constraints, manufacturing & services
1Q 2013-14
4.4%
CAD, Currency, sentiment
 Per Capita GDP in India is around $1,491 in 2012; 141th position amongst all countries

9. Current Scenario

RBI is raising interest rates


Sept: 7.5

Oct : 7.75


July : 7.25
Nov : Expected to go up
Expectation
Interest

Liquidity
Demand
Inflation
Reality
In spite of two consecutive raises in interest rates the inflation is at a 10
month high at 7%

10. Rationale

Inflation is currently driven by exogenous factors


Driven mostly due to fuel prices and increased demand

Falling rupee compounding the problem


WPI food inflation at 18.19%
20% avg hike in rural wages
Result of tightening policy

GDP forecast further revised to 4.8%

11. THANK YOU