Case study for Economics Project:

Course: PGPIBCM

Please refer to the project assessment sheet for grading

Assessment Process:

1. Trainer will distribute the case

2. Students will work on the following case and present their conclusions in a presentation format
with a supporting file (in case of any calculations)
3. The file must be uploaded by each participating student in their learning management system in
the project section
4. Student will be assessed for their performance individually during the presentation
5. The case needs to be presented within 7 days of case disbursement.

Case Details:

In its monetary policy review on August 2, 2017, the Monetary Policy Committee (MPC of RBI) decided to
cut repo rate and reverse repo rate by 25 bps to 6.0% and 5.75% respectively. This move in line with
market expectation since CPI has been lower than the target of 4% in last 6 months consecutively and it
went below 1.5% in June 2017. One of the members of MPC highlighted that the Core Inflation has still
been sticky and still hovering around 3.90% (close to target level). Given the gradually impact of roll out
of GST, increase in HRA allowance of Govt employee, increasing geo-political risk and base year effect, the
Central bank should have waited for few more data prints (expected to inch up inflation) & then decided,
Mr. Patra (MPC member) argued.

3 MPC members raised concern over farm loan waiver announced by various states and cited that it may
lead to spill over their fiscal deficit targets. These will lead to crowding out effect and nullify the impact of
lowering interest rate for private sector. While MR. Dolakia (MPC member) argued that since States are
bound by FRBM Act and accordingly will not be able to have larger than target deficit. To limit the deficit,
state would require cut in expenditure, which expected to have multiplier effect on economy and may
further slowdown in GPD growth.

In response to one question, Mr. Ghtake (MPC member) replied that RBI has taken note of appreciating
INR against USD in recent months and mentioned that market forces are best suited to decide the
appropriate rate of currency and the Central bank may not willing to handhold currency at every stage.
Excess volatility is contained, but trends should not be guided.
On the query of higher real interest rate scenario in India compared to all major nations, Ms. Pami Dua
(MPC member) point out that the main mandate for MPC is to keep inflation within stipulated range.
Though they consider the other economic dynamics, but real interest rate is less likely to drive the decision
of MPC.

Apart from economic indicators, the situation of NPAs loan and weak credit record of customer is biggest
obstacle in transmission of monetary policy stance, Mr. Acharya (MPC member) highlighted. Banks have
to resolve rising bad loan problem and until then credit off-take & corresponding investment in economy
will not happen.

Questions to be Answered in the presentation:

1. What is inflation, Core inflation and what are methods for measuring CPI? Why Core inflation was
higher than headline inflation? Do you agree with Mr. Patra’s statement?
2. What are the tools available with Central bank for managing monetary policy? What is your take
on RBI recent monetary policy stance?
3. What is fiscal deficit? What are pros and cons of having higher fiscal deficit? How crowding out
impact can nullify impact of reduction in rate by RBI?
4. What is your take on Mr Ghate’s statement about management of currency? Could you have
taken different stance in managing currency rates, as appreciation would be hurting growth of
economy?
5. What is real interest rate? In the context of Ms. Pami Dua statement, briefly explain the objectives
of Central bank and level of independence a Central bank can have in achieving them.
6. How do you analyses statement of Mr. Acharya about monetary policy transmission?
7. Excel task:
 Plot a chart of core inflation vs the interest rate
 Plot a chart of GDP for 10 years
 Plot a chart of 1 year t bill and 10 year government bond yield
 Comment on any significant changes or movements based on your analysis.