RBI MONETARY POLICY

PROJECT ON FREQUENT CHANGE IN MONETARY POLICY BY RBI

BACHELOR OF COMMERCE BANKING AND INSURANCE SEMESTER V (2011-2012)

IN PARTIAL FULLFILMENT OF THE REQUREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE BANKING AND INSURANCE.

SUBMITTED BY Mr. S. JAMES PETER ROLL NO.:-23

N.E.S RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE, BHANDUP (WEST), MUMBAI-400078
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RBI MONETARY POLICY

DECLARATION

I Mr. JAMES PETER STUDENT OF BACHLORS OF COMMERCE BANKING AND INSURANCE SEMESTER V (2011-2012) HERE BY DECLARES THAT I HAVE COMPLETED THE PROJECT ON FREQUENT CHANGE IN MONETARY POLICY BY RBI

THIS INFORMATION IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT JAMES PETER ROLL NO.:-23

RBI MONETARY POLICY

ACKNOWLEDGEMENT

First of all I would like to thank the Mumbai University for having project as a part of B.B.I curriculum. This project is a result of efforts of several people, who have affected its shape and content.

Completing a task is never one mans effort. It is often the result of invaluable contribution of number of individuals in direct or indirect way in shaping success and achieving it.

I would like to extend my sincere gratitude and appreciation to our principal Mrs. RINA SAHA, our course co-coordinator Mrs. RIYA RUPANI. It has indeed been a great learning, experiencing and working under her during the course of the project.

With great pleasure I thank, my project guide, Prof. Mrs. RIYA RUPANI, for being an inspiration in the completion of this project. I thank her for his invaluable guidance and numerous suggestions provided from time to time. I would like to thank the librarian of our college for helping me in finding out the relevant material for my project. I would like to appreciate all my college friends and family members who gave me all support and backing and always came forward whenever a helping hand was needed. THANK YOU!!!!!
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RBI MONETARY POLICY

SALVERY
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing. Changes in real interest rates affect the public's demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates. For example, a decrease in real interest rates lowers the cost of borrowing; that leads businesses to increase investment spending, and it leads households to buy durable goods, such as autos and new homes. In addition, lower real rates and a healthy economy may increase banks' willingness to lend to businesses and households. This may increase spending, especially by smaller borrowers who have few sources of credit other than banks.

RBI MONETARY POLICY

SR.NO 1.

TOPIC

PAGE.NO

Introduction To RBI

1-2

2.

Powers Of RBI

3-4

3.

Contribution Of RBI

4.

Monetary Policy

5.

Monetary policy and Fiscal policy

6.

History Of Monetary Policy

8-11

7.

Monetary Policy Tools

12-14

8.

Techniques Of Monetary Policy

15-22

9.

How Change In Repo Rate Affect Inflation With Diagram

23-27

10.

Frequent Change Made In Monetary Policy By RBI

28-30

11.

RBI Annual Monetary Policy 2010-2011

31-33

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12.

11hikes In Past 16months With Diagram

34

13.

Summary Of Other Central Bank And Interest Rate

35

14.

Performance Of Auto, Realty, Stock Market & Banking Sector After 11hikes

36-41

15.

Experts View

42-45

16.

Policy Of Various Nation

46

17.

Recommendation

47

18.

Conclusions

48

19.

Bibliography

49

20.

Wibiliography

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RBI MONETARY POLICY

INTRODUCTION TO RBI

India's central bank is the Reserve Bank of India (RBI). Reserve Bank of India monitors formulates and implements India's monetary policy. Established in the year 1935, Reserve bank of India was nationalized in the year 1949.Owned fully by the Government of India, Reserve Bank has are 22 regional offices in various state capitals of India with its headquarters located in Mumbai. It has a majority stake in the State Bank of India. It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

RBI MONETARY POLICY In accordance with the provisions of the RBI Act, 1934 with the main functions as: (i) Operating monetary policy with the aim of maintaining economic and financial stability and ensuring adequate financial resources for development purposes

(ii) Meeting the currency requirement of the public;

(iii) Promotion of an efficient financial system;

(iv) Foreign exchange reserve management;

(v) The conduct of banking and financial operations of the government. It can be summarised by the preamble as"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

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OTHER POWERS OF RBI

RBI has the power to suspend any provision of the act if it deems fit for a period of 60 days. In absence of Governor of RBI, Deputy Governor can perform the same for a period of 30days.It can extend the period up to 7years from 5years for disposing of non-banking assets by the banks, if it is in the interest of the depositors. RBI has the final authority to decide on the paid-up capital and reserves. If any banking company wishes to form a subsidiary company for the purpose of carrying out a business solely outside india, has to obtain RBI's prior permission. RBI can prohibit any bank from granting any further loans or advances or impose such restrictions or give such direction if it appears from the returns submitted that the interest of the depositors are likely to suffer. For remitting any debt due to the bank by its directors, prior approval of RBI is required. The RBI is expected look from the monthly returns to the compliance with regard to maintenance or percentage of assets in India by banking business,and to maintenance of assets in India through quarterly returns.Special audit of the banks can be performed whenever necessary.Balance sheet and accounts have to be submitted by the banking companies to RBI every year end. The Reserve Bank may caution or prohibit banking companies generally or any banking company in particular against entering into any particular transaction or class of transactions, and generally give advice to any banking company.RBI gives assistance to any banking company by means of the grant of a loan or advance to it.

RBI MONETARY POLICY At any time, if it is satisfied that in the public interest or in the interest of banking policy or for preventing the affairs of the banking company being conducted in a manner detrimental to the interests of the banking company or its depositors it may. Require the banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company, or require an officer of the banking company to discuss any such matter with an officer an officer of the Reserve Bank; Depute its officers to watch the proceedings at any meeting of the Board of directors of the banking company; require that banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank; Require the Board of directors of the banking company to give in writing to any officer specified by the Reserve Bank in this behalf at his usual address all notices of, and other communications relating to, any meeting of the Board, committee or other body constituted by it; Appoint one or more of its officers to observe the manner in which the affairs of the banking company or of its offices or branches are being conducted and make a report thereon; Require the banking company to make, within such time as may be specified in the order, such changes in the management as the Reserve Bank may consider necessary

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CONTRIBUTION OF RBI TO INDIA

The economic importance of commercial banks to developing countries may be viewed thus : Promoting capital formation Encouraging innovation.

PROMOTING CAPITAL FORMATION

A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving.RBI makes sure the banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.RBI regulates the policies of money lending, interest etc to make sure promotion of capital formation takes place.

ENCOURAGING INNOVATION
The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth.Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

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MONETARY POLICY

The Monetary Policy for 2010-11 is set against a rather complex economic backdrop. Although the situation is more reassuring than it was a quarter ago, uncertainty about the shape and pace of global recovery persists. Private spending in advanced economies continues to be constrained and inflation remains generally subdued making it likely that fiscal and monetary stimuli in these economies will continue for an extended period. Emerging market economies (EMEs) are significantly ahead on the recovery curve, but some of them are also facing inflationary pressures. Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.

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RBI MONETARY POLICY

FISCAL AND MONETARY POLICY

They are both used to: Keep inflation low (inflation target of 2%) Maintain positive economic growth (close to long run trend rate of 2.5%) Aim for full employment

The principle aim of fiscal and monetary policy is to reduce cyclical fluctuations in the economic cycle. Often it is inflation targeting which is stressed most for monetary policy. Fiscal Policy Involves changing government spending and taxation. It involves a shift in the governments budget position. e.g. Expansionary fiscal policy involves tax cuts, higher government spending and a bigger budget deficit. Monetary policy Involves influencing the demand and supply of money, primarily though the use of interest rates. It can also involves unorthodox policies such as open market operations and quantitative easing.

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HISTORY OF MONETARY POLICY

Monetary policy is associated with interest rates and availabilility of credit. Instruments of monetary policy have included short-term interest rates and bank reserves through the monetary base. For many centuries there were only two forms of monetary policy: Decisions about coinage

Decisions to print paper money to create credit.

Interest rates, while now thought of as part of monetary authority, were not generally coordinated with the other forms of monetary policy during this time.

Monetary policy was seen as an executive decision, and was generally in the hands of the authority with seigniorage, or the power to coin. With the advent of larger trading networks came the ability to set the price between gold and silver, and the price of the local currency to foreign currencies. This official price could be enforced by law, even if it varied from the market price. Paper money called "jiaozi" originated from promissory notes in 7th century China. Jiaozi did not replace metallic currency, and were used alongside the copper coins. The successive Yuan Dynasty was the first government to use paper currency as the predominant circulating medium. In the later course of the dynasty, facing massive shortages of specie to fund war and their rule in China, they began printing paper money without restrictions, resulting in hyperinflation. With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established.The goal of monetary policy was to maintain the value of the coinage, print notes which would trade at
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RBI MONETARY POLICY par to specie, and prevent coins from leaving circulation. The establishment of central banks by industrializing nations was associated then with the desire to maintain the nation's peg to the gold standard, and to trade in a narrow band with other gold-backed currencies. To accomplish this end, central banks as part of the gold standard began setting the interest rates that they charged, both their own borrowers, and other banks who required liquidity. The maintenance of a gold standard required almost monthly adjustments of interest rates. During the 1870-1920 period, the industrialized nations set up central banking systems, with one of the last being the Federal Reserve in 1913. By this point the role of the central bank as the "lender of last resort" was understood. It was also increasingly understood that interest rates had an effect on the entire economy, in no small part because of the marginal revolution in economics, which demonstrated how people would change a decision based on a change in the economic trade-offs. Monetarist macroeconomists have sometimes advocated simply increasing the monetary supply at a low, constant rate, as the best way of maintaining low inflation and stable output growth.However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to be impractical, because of the highly unstable relationship between monetary aggregates and other macroeconomic variables.Even Milton Friedman acknowledged that money supply targeting was less successful than he had hoped, in an interview with the Financial Times on June 7, 2003. Therefore, monetary decisions today take into account a wider range of factors, such as:

Short term interest rates. Long term interest rates. Velocity of money through the economy. Exchange rates. Credit quality. Bonds and equities (corporate ownership and debt). Government versus private sector spending/savings. International capital flows of money on large scales. Financial derivatives such as options, swaps, futures contracts, etc.

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RBI CONTROL OF INFLATION

Inflation is the supply of excess money and credit relative to the goods and services produced, resulting in increased prices. As the layman understands it, inflation results in the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index.

Inflation in India is also a grave issue of concern, given the vast disparity between the rich and the poor on the one hand or the Rural and the Urban on the other. Skyrocketing inflation robs the poor, and hurts others, though much less grievously. The fruits of the much-talked about economic growth have not reached large sections, especially in the rural areas.

Under extant conditions, the benefit of high prices paid by consumers does not flow back to primary producers, but is siphoned away by middlemen and speculators who enjoy a free run in an economy of shortages. If attention to agriculture has been limited to rendering lip service, inefficiencies in the physical market remain unattended. With production trailing demand in recent years, shortages of essential commodities have widened. Imports have become expensive because of high global market prices.

It may be instructive to remember that inflation is not an overnight phenomenon. It is benign to the extent that it allows you time to cover yourself. In India, the onus to control and take control of the situation of inflation is upon the Reserve Bank of India (RBI).

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RBI MONETARY POLICY The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the Reserve Bank to decide the percentage of scheduled banks' demand and time liabilities to be maintained as Cash Reserve Ratio (CRR) without any ceiling or floor. Consequent to the amendment, no interest will be paid on CRR balances so as to enhance the efficacy of the CRR, as payment of interest attenuates its effectiveness as an instrument of monetary policy.

The Reserve Bank of India (RBI) follows a multiple indicator approach to arrive at its goals of growth, price stability and financial stability, rather than targeting inflation alone. This, of course, leads to criticism from mainstream economists. In its effort to balance many objectives, which often conflict with each other, RBI looks confused, ineffective and in many cases a cause of the problems it seeks to address.

The RBI has certain weapons which it wields every time and in all situations to counter any form of inflationary situation in the economy. These weapons are generally the mechanisms and the policies through which the Central Bank seeks to control the amount of credit flowing in the market. The general stance adopted by the RBI to fight inflation is discussed in brief in part

(A) Of the paper.

(B) Would raise the question of whether this mechanism used by the RBI has passed its prime and thus now the RBI needs to take up a holistic approach to the same.

(C) Would then deal very briefly with the suggestions that may shed some light on what could be the possible steps RBI could take to control rising prices.
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DISCOUNT WINDOWS LENDING

INTEREST RATE

MONETARY POLICY TOOLS

CURRENCY BOARD

MONETARY BASE

RESERVE REQUIREMENT

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RBI MONETARY POLICY

Monetary base Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base. The central bank buys or sells reserve assets (usually financial instruments such as bonds) in exchange for money on deposit at the central bank. Those deposits are convertible to currency. Together such currency and deposits constitute the monetary base which is the general liabilities of the central bank in its own monetary unit. Usually other banks can use base money as a fractional reserve and expand the circulating money supply by a larger amount. Reserve requirements The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier. Discount window lending Discount window lending is where the commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit conditions (i.e., the amount of money they have to loan out), thereby affecting the money supply. It is of note that the Discount Window is the only instrument which the Central Banks do not have total control over. By affecting the money supply, it is theorized, that monetary policy can establish ranges for inflation, unemployment, interest rates ,and economic growth. A stable financial environment is created in which savings and investment can occur, allowing for the growth of the economy as a whole. Interest rates
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RBI MONETARY POLICY The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool open market operations; one must choose which one to control.

Currency board A currency board is a monetary arrangement that pegs the monetary base of one country to another, the anchor nation. As such, it essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold: To import monetary credibility of the anchor nation.

To maintain a fixed exchange rate with the anchor nation.

To establish credibility with the exchange rate (the currency board arrangement is the hardest form of fixed exchange rates outside of dollarization).

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TECHNIQUE TO CREDIT CONTROL / MONETARY POLICY

Bank Rate
Bank rate is that rate which is charged by Central bank for issue loan to the member banks. By changing it, central bank can control the credit.

If Central bank increase this bank rate, all commercial banks will increase their
interest rate by this loan become costly and flow of fund in the form of credit will decrease.

If central bank wants to expand credit, then Central bank will decrease bank
rate, after this commercial bank can get advance and loan at cheap rate and by this

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RBI MONETARY POLICY way, they also decrease their interest rate. After this flow of cash in the form of loan will increases. Open Market Operation Open market operation is the all action which is done by central bank for purchase and sale of member banks' security in open market. If RBI wants to contract the credit, then RBI will sell the security of member bank and member bank's flow of cash will stop. If RBI wants to expand credit in recession, then RBI will start to buy the security of member banks and member banks get cash and they can now use it for providing more loans to customers. Cash Reserve Ratio / Statutory minimum reserve:Cash reserve ratio is the minimum percentage of the deposit to be kept as reserve by the banks with central bank. It can be used as the technique of monetary policy. By changing cash reserve ratio, RBI can contract or expand credit in Indian economy.

If RBI wants to contract credit, and then RBI will increase this ratio. After this
all banks have to keep more fund as reserve with RBI. So, they will decrease the amount of loan due to decrease the total fund available for enterprises.

If RBI wants to expand credit, then RBI will decrease this ratio, after this all
banks have to keep less fund as reserve with RBI. So, they will issue more credit to public. Changes in Marginal Requirement of loan:Marginal requirement is the difference between value of security and actual loan accepted by bank. Suppose a person wants to take loan of Rs. 80 , we has to give security of Rs. 100 then marginal requirement is Rs. 100 - Rs. 80 = Rs. 20 .

If RBI wants to contract the credit , this rate will increase suppose , if RBI fixes
it as 40 % , then customer can get loan of Rs. 60 after giving security of Rs. 100 . So , trend of getting loan will decrease .
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If RBI wants to expand the credit, this rate will decrease suppose, if RBI fixes
it as 10% more people will take loan , if they get Rs. 90 in cash after giving security of Rs. 100 . Moral Persuasion / Inspiration RBI as central bank of country can control credit with moral persuasion. Under thispersuasion, RBI can call a meeting of all commercial bank and give advice in discussion that they should not give loan for speculative purposes. Rationing of Credit RBI has right to create ration of credit under monetary policy. It can be done by following way:

To fix the amount of loan for a particular bank. To fix Quota for all banks. To fix Quota for different traders.

Regulation of consumer credit

In case inflation, prices are increased. To control prices central bank contract
credit to reduce the total amount of installment for payment.

In case of deflation, prices are decreased to control prices central bank expand
credit to increase the amount of installment

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MONETARY MEASURES

On the basis of the current assessment and in line with the policy stance as outlined in Section III, the Reserve Bank announces the following policy measures: Bank Rate

The Bank Rate has been retained at 6.0 per cent. Repo Rate

It has been decided to:

Increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. Reverse Repo Rate

It has been decided to:

Increase the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. Cash Reserve Ratio

It has been decided to:

Increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010. As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbed from the system. The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, closely and take further action as warranted.

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Expected Outcomes The expected outcomes of the actions are: Inflation will be contained and inflationary expectations will be anchored. The recovery process will be sustained. 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.

Unconventional monetary policy at the zero bound

Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, and signaling. In credit easing, a central bank purchases private sector assets, in order to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for future interest rates. For example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an extended period, and the Bank of Canada made a conditional commitment to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010.

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MONETARY POLICY REGIMES

In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets The multiplier effect of fractional reserve banking amplifies the effects of these actions. Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate. The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority. Monetary Policy: Inflation Targeting Price Level Targeting Monetary Aggregates Fixed Exchange Rate Gold Standard Target Market Variable: Long Term Objective:

Interest rate on overnight debt A given rate of change in the CPI Interest rate on overnight debt A specific CPI number The growth in money supply A given rate of change in the CPI

The spot price of the currency The spot price of the currency The spot price of gold Low inflation as measured by the gold price Usually unemployment + CPI change

Mixed Policy

Usually interest rates

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RBI MONETARY POLICY The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking exactly the same variables (such as a harmonized consumer price index). Inflation targeting

Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range. The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar. The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.

Price level targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years.

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RBI MONETARY POLICY Monetary aggregates

In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc.). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman. This approach is also sometimes called monetarism. While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities. Fixed exchange rate

This policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation. Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency trades at its market/unofficial rate. Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. Gold standard

The gold standard is a system under which the price of the national currency is measured in units of gold bars and is kept constant by the government's promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting. The minimal gold standard would be a long-term commitment to tighten monetary policy enough to prevent the price of gold from permanently rising above parity.

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HOW CHANGES IN THE REPO RATE AFFECT INFLATION

The way in which changes in the repo rate affect inflation and the rest of the economy is known as the transmission mechanism. The transmission mechanism is actually not one but several different mechanisms that interact. Some of these have a more or less direct impact on inflation while others take longer to have an effect. It is generally held that a change in the repo rate has its greatest impact on inflation after one to two years.

The first thing that happens when the Risks bank changes the repo rate is that the so-called overnight rate is affected. The overnight rate is the rate at which the banks borrow and lend money to one another during the day. The size of the effect that a change in the repo rate has on interest rates with a longer duration depends on how expected the adjustment is.
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The Risks bank aims to make its monetary policy predictable.

The Risks bank tries to affect expectations of future monetary policy by regularly publishing forecasts for the repo rate. In this way it is easier to avoid changes in the repo rate coming as a surprise. Banks lending rates and interest rates on securities are affected therefore by both the actual and expected repo rate. If a raise in the repo rate is fully expected, market rates can begin to rise before the repo rate itself is raised. When the repo rate is actually raised, it will not necessarily have any further effect on market rates if it merely confirms market expectations.

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SCHEMATIC DIAGRAM OF THE MONETARY POLICY TRANSMISSION MECHANISM

Monetary policy thus has an effect on the interest rates the general public face and thereby also on the total demand and total supply in the economy. The channels that mean that market interest rates affect supply and demand can be divided into the interest rate channel, the credit channel and the exchange rate channel. You can read more about these channels below.
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RBI MONETARY POLICY Credit channel The credit channel describes the way in which monetary policy affects demand via banks and other financial institutions. If the interest rate rises, banks choose to decrease their lending and instead buy bonds. This means that households and companies find it more difficult to borrow money. Companies that are either unable or unwilling to borrow must cut back their activities, postpone investment and so on, and this dampens activity in the economy. Interest rate channel The interest rate channel affects the demand for goods and services. Higher interest rates normally lead to a reduction in household consumption. This happens for several reasons. Higher interest rates make it more attractive to save, in other words to postpone consumption, thus lowering present consumption. Consumption also falls because existing loans now cost more in terms of interest payments. Finally, higher interest rates mean that the price of both financial and real assets shares, bonds, property, etc. - falls in that the present value of future returns drops when interest rates rise. When faced with dwindling wealth, households become less willing to consume. A rise in interest rates also makes it more expensive for firms to finance investment. As a result, higher interest rates normally curtail investment. If consumption and investment fall, so does aggregate demand. Lower aggregate demand results in lower resource utilisation. When resource utilisation is low, prices and wages usually rise at a more modest rate. However, it takes time before a decline in resource utilisation leads to a fall in inflation. This is partly because wages do not change from month to month but more seldom than that. Exchange rate channel The exchange rate channel describes how monetary policy affects the value of the currency. Normally, an increase in the repo rate leads to a strengthening of the krona. In the short term, this is because higher interest rates make Swedish assets more attractive than investments denominated in other currencies. The result is a capital inflow and increased demand for kronor, which strengthens the exchange rate.
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RBI MONETARY POLICY

Monetary policy also plays an important part for the exchange rate in the long term. By definition, the exchange rate is the price of a countrys currency expressed in terms of another countrys currency, which means that it is affected by differences in inflation between countries. Tighter monetary policy means lower inflation, which in the long run can be expected to be reflected in a stronger exchange rate. A stronger exchange rate an appreciation has an impact on the economy in two main ways. First, foreign goods become cheaper compared with domestically produced goods. This leads to a rise in imports and a decline in exports. Lower demand for domestic goods contributes to a reduction in resource utilisation and dampens inflationary pressure. Second, the exchange rate affects inflation through changes in the krona prices of goods for cross-border trade. Firms that import goods to Sweden pay a lower price in kronor for their imports. In this way, a stronger krona tends to lower the inflation rate, since imported goods and import-competing goods become cheaper. This reinforces the dampening effect on inflation of falling demand. Inflation expectations Inflation expectations are important to the way in which companies set prices and to how wage formation functions and thereby to inflation. If everyone trusts that inflation will remain low and that prices will only rise temporarily, this will lead companies to consider that they do not need to change their prices as often. An employee may reason in the same way with regard to wage demands, which means that the outcome from wage bargaining rounds is at a reasonable level. Both of these events make it easier for the Riksbank to achieve price stability.

However, if inflation expectations deviate from the target, it may indicate that the public does not believe that the Riksbank will manage to keep inflation around 2 per cent. The Riksbank may then need to adjust the repo rate at a different pace than is reflected in expectations of future monetary policy. In this way, different measures of inflation expectations and market expectations of monetary policy serve as a supplement to the Riksbank's own forecasts for inflation and the interest rate. The Riksbank therefore regularly follows developments in various measures of inflation expectations and publishes them in its Monetary Policy Report.
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RBI MONETARY POLICY

FREQUENT CHANGES MADE IN MONETARY POLICY BY RBI

The Annual Monetary Policy for 2011-12 was presented by RBI Governor D.Subbarao on 3 May 2011. The Monetary Policy 2011-12 aim at maintaining an interest rate environment that moderates inflation and anchors inflation expectations. Also the policy targets to foster an environment of price stability that is conducive to sustaining growth in the medium-term, coupled with financial stability. Lastly, the policy is aimed at managing 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. The following are highlights of the Annual Monetary Policy 2011-12: RBI increased the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 6.75 per cent to 7.25 per cent with immediate effect. The reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, automatically adjusts to 6.25 per cent with immediate effect.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands calibrated at 8.25 per cent. This rate will come into effect on operationalisation of the MSF. The Bank Rate has been retained at 6.0 per cent. The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their NDTL.

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RBI MONETARY POLICY

As indicated in the Second Quarter Review of Monetary Policy 2010-11, the policy discussion paper delineated the pros and cons of deregulating the savings bank deposit interest rate was placed on the Reserve Banks website on 28 April 2011 for feedback from the general public. Reserve Bank of India (RBI) capped bank investments into liquid schemes to 10 per cent of the banks net worth as of 31 March of the previous fiscal.

Reserve Bank of India (RBI) in May 2011 decided to accept the broad framework of regulations recommended by the Malegam Committee report on micro finance institutions (MFIs)

The Bank's baseline inflation projections are that the inflation rate will remain close to the March 2011 level over the first half of 2011-12, before declining. These projections factor in an upward revision of petrol and diesel prices. While the persistence of inflation over the next few months has been incorporated in this policy, the Reserve Bank will continue to persevere with its anti-inflationary stance.

The monetary policy actions in this review are expected to

Contain inflation by reining in demand side pressures, and anchor inflationary expectations. Sustain the growth in the medium-term by containing inflation. The Reserve Bank declared that it would adhere to internationally agreed phase-in period (beginning 1 January 2013) for implementation of the Basel III framework. The Reserve Bank declared that it is studying the Basel III reform measures for preparing appropriate guidelines for implementation.

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RBI MONETARY POLICY

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RBI MONETARY POLICY

RBI ANNUAL MONETARY POLICY: 2010-11

RBI came out with its annual monetary policy for 2010-11 which was in line with market expectations. RBI hiked repo, reverse repo and CRR by 25 bps each. The policy rate hikes will be done with immediate effect while the CRR hike will be effective from April24. The increase in CRR is expected to absorb about Rs 12500cr from the system. In the wake of the global economic crisis, the RBI pursued an accommodative monetary policy beginning mid-September 2008 However, strong signs of recovery in the economy and rising inflation, both consumer as well as asset price inflation, the RBI embarked on the first phase of exit from the expansionary monetary policy by restoring the statutory liquidity ratio (SLR) of scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October 2009. The process was carried forward by the second phase of exit when the RBI announced a 75 bps increase in the CRR in the Third Quarter Review of January 2010. As inflation continued to increase and exceeded the RBIs baseline projection of 8.5% for March 2010, RBI responded expeditiously with a mid-cycle increase of 25 bps each in the repo rate and the reverse repo rate on March 19, 2010 MONETARY MEASURES Bank Rate Unchanged at 6.0%. Repo Rate Hiked from 5.0% to 5.25% (with immediate effect). Reverse Repo Rate Hiked from 3.5% to 3.75% (with immediate effect). Cash Reserve Ratio Hiked from 5.75% to 6.0% (effective from April 24).As a result of the hike in CRR, Rs. 12500cr (approx.) of excess liquidity will be Absorbed from the system. Statutory Liquidity Ratio Unchanged at 25%.

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RBI MONETARY POLICY

OUTLOOK AND PROJECTIONS

GDP Growth Projection RBI placed its GDP growth projection for 2010-11 at 8.0% with an upside bias under the assumption of a normal monsoon and good performance of the industrial and services sectors. Inflation Projection Keeping in view domestic demand-supply balance and the global trend in Commodity prices, the baseline projection for WPI inflation for end-March 2011 is Placed at 5.5%.

Monetary Projection
The projection of money supply growth for 2010-11 is placed at 17%. Consistent with this, aggregate deposits of Scheduled Commercial banks (SCBs) are projected to grow by 18%. The growth in non-food credit of SCBs is placed at 20%.

OTHER STANCES
Introduction of a reporting platform for all secondary market transactions in Certificate of Deposits (CDs) and Corporate Papers (CPs) FIMMDA has been requested to start work on developing a platform for CDs and CPs Similar to its existing platform for corporate bonds. To allow banks to classify their investments in non-SLR bonds issued by companies Engaged in infrastructure activities and having a minimum residual maturity of seven Years under the held to maturity (HTM) category

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RBI MONETARY POLICY By end of June, the bank proposes to prepare the draft for Credit Default Swaps (CDS) introduction. Around the same time, it will finalize OTC forex derivatives norms. In order to give a further thrust to infrastructure financing by banks, it is proposed that infrastructure loan accounts classified as sub-standard will attract a provisioning of 15% instead of the current prescription of 20%. To avail of this benefit of lower provisioning, banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on such cash flows The hike in policy rates and CRR is broadly in line with expectations. The well balanced measures taken by the RBI are aimed at controlling inflation and promoting sustainable growth. There are speculations of lending getting more expensive but the system still possesses a lot of liquidity and April-June quarter is a lean period for credit offtake and hence the interest rates should not move sharply in an upward trend. RBI has given indications to act on rates again if Inflation is not contained by the current rate hike. Cost of Consumer finance loans may rise marginally but it is not likely to be affected much as demand for consumer goods is very strong and may not be impacted by a 25 basis point hike in key policy rates.

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RBI MONETARY POLICY

11HIKES IN PAST 16MONTHS

Diagram:REPO RATE REVERSE REPO RATE

8% 7.00% 7.25% 6.25% 5.75% 4.75% 5% 5.25% 7.50% 6.75% 7%

5%

5.50%

5.75%

6%

6.25%

6.50%

6.75%

3.75%

4%

4.25%

4.50%

19th march 2010

2nd july 27th july 16th sep 2nd nov 25th jan 2010 2010 2010 2010 2011

17th march 2011

21th april 3rd may 16th june 26th july 2011 2011 2011 2011

Explanation:In last 16months RBI has changed the monetary policy frequently to have control on the inflation rate which was going high in India. The continues change by RBI has effected every sector in the country. As in the diagram it is clearly mentioned that from 5% the repo rate has changed to 8% which as effected in every sector and also the reverse repo rate i:e from 3.75% - 7% just in last 16months by the RBI this frequent change by the RBI has changed the loan interest rate of the bank and the EMI etc which as effected the stock market which was not before the stock market fell down around 300points in the history of stock market with just in 2-3days.The continues change has not affected the inflation rate but it as affected rest all sector as well.

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RBI MONETARY POLICY

SUMMARY OF OTHER CENTRAL BANKS INTEREST RATES CENTRAL BANK INTEREST RATE

REGION

PERCENTAGE

DATE

FED interest rate RBA interest rate

United States Australia

0.250 % 4.750 %

12-16-2008 11-03-2010

BACEN interest rate

Brazil

2.500 % 07-20-2011

BOE interest rate

Great Britain

0.500 %

03-05-2009

BOC interest rate PBC interest rate

Canada China

1.000 % 6.560 %

09-08-2010 07-06-2011

ECB interest rate

Europe

1.500 %

07-07-2011

BOJ interest rate

Japan

0.100 %

10-05-2010

CBR interest rate SARB interest rate

Russia South Africa

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8.250 % 5.500 %

04-29-2011 11-19-2010

RBI MONETARY POLICY

PERFORMANCE OF REALTY, AUTO, STOCK MARKET, BANKS AFTER 11 RATE HIKES

In the last 16 months, since March 19, 2010 till July 26, 2011) the RBI had ... As of now, the repo rate stands at 8% and the reverse repo has touched 7%.(11 times)

IMPACT ON DEBT MARKET

The initials reaction of bond market to the monetary policy was that of positive relief. Benchmark 10yrs G-sec yield fell from 8.80% on april19-2011 to 7.98% on april2010 as the rate hikes were broadly in line with expectations. Moreover, RBI inflation estimates of 5.5% for march 2011, through a tad too optimistic,were taken as positive. The stance of RBI towards liquidity comfortable in the near term to ensure a smooth passage of the government borrowings also helped spark the relief rally. However, going ahead, yield movements will be guided more by the supply side pressure in the form of a huge government borrowings plan and by the movement of oil prices as they threaten to widen the fiscal deficit. On the whole, we expect 10yrs G-sec yield to hover near the 8% mark in the near term. Short term yields are likely to see upward pressure and might rise to 7% levels from the 6.5-6.6% levels at present call money rates are likely to continue hovering near to the lower end of the LAF band i:e 3.75% as liquidity continues to remain comfortable in the system even after the hikes.

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RBI MONETARY POLICY

IMPACT ON EQUITY MARKET

The rate hikes of 25bps across. Repo & Reverse repo is in line with expectation and has been welcomed by the way the broader equity indices moved just after the announcement of policy.

While, the rate hike definitely increases the cost of funds for banks the same in unlikely to be passed on to consumers immediately given the weak credit growth and ample liquidity in the banking system.

Also RBIs move to allow banks to classify their investments in Non-SLR bonds issued by infrastructure companies with residual maturity period of 7yrsin HTM category and the changes in provisioning norms relating to substandard infrastructure loan accounts is positive for infrastructure companies as well as banks. Post the credit policy the markets are likely to see the information of two camps of investors.

One which believes that RBI is behind the curve in terms of rate hikes and will not be able to control inflation(this camp will tend to be bearish on markets) and the growth and inflation effectively(this camp is likely to be bullish). All others things remaining constant, the future determined by markets are likely to be determined by which camp outweighs the others in terms of number of participants.

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RBI MONETARY POLICY Money control Bureau Whenever Reserve Bank of India (RBI) has raised key policy rates, rate sensitive sectors like auto, banks and realty have reacted. Yesterday, the RBI hiked its key policy rates

Repo and reverse repo rates By 50 basis points each and realty.
bank and auto stocks were seen as major laggards in the market as they fell 3.5%, 2.46% and 2.14%, respectively. In the last 16 months, since March 19, 2010 till July 26, 2011) the RBI had increased interest rate 11 times. On a cumulative basis, after the latest hike, interest rates hike comes to 3.25% in the aid period ( See table ). As of now, the repo rate stands at 8% and the reverse repo has touched 7%. The cash reserve ratio (CRR) is unchanged at 6%. In the period between March 19, 2010 and July 26, 2011, realty has been the worst performer tumbling 36%. But bankex and auto have been positive performers as they were up by 22% and 15% respectively

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RBI MONETARY POLICY

Sector Performance BSE 19-03-10 Index Auto Bankex Realty Sensex 7,629.37 10,432.19 3,340.81 17,578.23

26-07-11 8,789.78 12,694.05 2,144.18 18,518.22

% Chg 15.21 21.68 -35.82 5.35

Realty Index: In the realty space, Unitech , Ackruti City, Orbit Corporation and D B Realty were down 50-80% while Godrej Properties was up over 50%. Bankex: All BSE bankex stocks have given positive returns during the same period. Federal Bank , IndusInd Bank and Bank of Baroda gained by 4573%. Auto Index: In the period under consideration, Maruti Suzuki , Amtek Auto and Hero Honda Motorslipped 18%, 9% and 8%, respectively. Bajaj Auto, Cummins India, M&M and Exide Industries surged 30-52%. Rupin Shah of BP Equities told moneycontrol.com that 11th rate hike by RBI would hit commercial vehicles segment more than small car manufacturers. Around 75-80% of commercial vehicle sales depend on loans and refinancing of vehicles. Higher diesel prices will further add to the woes of commercial vehicle manufacturing companies. He further added, I am quite bullish on M&M as the company has diversified well in recent times. I am not too optimistic on Ashok Leyland and Tata Motors .

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RBI MONETARY POLICY Company Auto Bajaj Auto Cummins India M&M Exide Inds. Bharat Forge Tata Motors Ashok Leyland Apollo Tyres Hero Honda Motor Amtek Auto Maruti Suzuki Realty Godrej Propert. Phoenix Mills Sobha Developer. Mahindra Life. Parsvnath Devl. DLF Peninsula Land Indbull.RealEst. Anant Raj Inds.
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Close Price 19-03-2010 26-07-2011 %Chg 932.68 499.2 536.65 115.6 261.25 783.7 54.05 77.9 1968.4 173.1 1429 1423.75 677.5 716.7 150.35 335.65 973.15 52.6 74.05 1818.25 158 1177.95 52.65 35.72 33.55 30.06 28.48 24.17 -2.68 -4.94 -7.63 -8.72 -17.57

506.25 193.75 272.3 398.45 57.23 312.7 75 160.2 134.75

794.1 215.85 267.95 365.95 48.15 233.6 54 110.25 82.65

56.86 11.41 -1.60 -8.16 -15.87 -25.30 -28.00 -31.18 -38.66

RBI MONETARY POLICY HDIL Sunteck Realty Unitech Ackruti City Orbit Corpn. D B Realty Bank Federal Bank IndusInd Bank Bank of Baroda HDFC Bank Yes Bank Canara Bank Kotak Mah. Bank Punjab Natl.Bank Bank of India St Bk of India Axis Bank Union Bank (I) IDBI Bank ICICI Bank 258.75 173.65 617.1 363.64 246.95 407.85 373.08 964 327.2 2058.5 1155.15 271.9 118.05 954.85 48.75 268.85 899.6 497.85 319.4 513.45 466 1164.85 388.8 2441.8 1319.85 304.05 131.45 1040.6 73.43 54.82 45.78 36.91 29.34 25.89 24.91 20.84 18.83 18.62 14.26 11.82 11.35 8.98 299.25 583.35 73.7 546.35 138.48 457.7 152.25 294.75 34.45 187.45 41.45 80.65 -49.12 -49.47 -53.26 -65.69 -70.07 -82.38

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RBI MONETARY POLICY

EXPERT VIEWS ON RBI RATE HIKE

Leif Eskesen, Chief Economist for India & ASEAN HSBC Global Research, Singapore The RBI on Tuesday continued the tightening cycle and thankfully took a more decisive step with a 50 basis point hike, beating market expectations. The case for an aggressive move was strong, but the heightened uncertainty about the global economy and exaggerated concerns about the moderation in the domestic economy had actually raised pressures for a pause, mostly from groups seeking to protect their own short-term interests, rather than internalizing what is ultimately the best for the economy as a whole.

Sonal Varma, India Economist, Nomura Financial Advisory and Securities (India) Pvt. Ltd The Reserve Bank of Indias (RBI) decision to hike the repo rate by 50 basis points to 8% has come as a surprise. While global uncertainties have risen, the RBI remains confident that moderation of domestic growth is not yet broad-based, even as the rise in inflation is becoming more so. Inflation expectations are becoming entrenched due to persistently high food prices, while rising wages are another worry. In this backdrop, the RBI remains firmly on the tightening path that started 16 months ago. The key question, going forward, is whether more tightening is necessary.

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RBI MONETARY POLICY Saugata Bhattacharya, senior vice-president (business and economic research) at Axis Bank The 50 basis points (bps) increase in the repo rate by the Reserve Bank of India (RBI) was an even bigger surprise this time than the similar increase in early May 2011 (one basis point is onehundredth of a percentage point). The question is, why now? In late April, with global commodity prices climbing, and the peak in inflation still some time away, the January-March quarter financials still looking strong, credit growth at close to 23%, front loading of rate increases might have been the logical policy response. A.Prasanna, vice-president, ICICI Securities Primary Dealership Ltd The central bank rolled back a few years and proceeded to shock financial markets with a 50 basis points hike in the repo rate. The previous regime at the Reserve Bank of India (RBI) viewed surprising markets as a useful tactic. Under the current governor, RBI preferred to be more transparent and believed in guiding markets about nearterm policy direction. The July rate action was thus a clear departure from this template. Tamal Bandyopadhyay, deputy managing editor, Mint The decision of the Reserve Bank of India (RBI) to raise its policy rate by half a percentage point surprised the market as the widespread expectation was a quarter percentage point hike. And this is not the only surprise in the Indian central banks quarterly review of monetary policy. There are other surprises too. For instance, RBI has admitted that growth is slowing, but has not changed its growth projection for the year, even though the year-end inflation projection has been raised from 6% with an upward bias to 7%. Unchanged at 8%, the growth projection for fiscal 2012 seems a bit optimistic at this point.

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RBI MONETARY POLICY Manas Chakravarty senior editor, Mint Why did the Reserve Bank of India (RBI) raise its policy rate by 50 basis points (bps) this time? The risks to growth from uncertainties abroad, which were made much of by the central bank in its mid-quarter policy statement in June, have increased instead of dissipating. The central bank also acknowledges that domestic growth has moderated somewhat in the first quarter of 2011-12, although it reiterates the slowdown is still not broad-based. RBI shocks with 50 bps rate hike Corporate and individual loans will become more expensive after the Reserve Bank of India (RBI) on Tuesday surprised the market with a half percentage point hike in its policy rate to reign in high inflation, even as it highlighted the governments own inadequacy to tackle what has been, for well over a year now, the countrys most pressing macroeconomic problem.

Subir Gokarn, deputy governor, RBI The inflation trajectory has changed and with this there is a decisive change in the central banks policy stance, said Reserve Bank of India (RBI) deputy governor Subir Gokarn in an interview.

Tamal Bandyopadhyay Commercial banks as well as Indian corporations do not want the countrys central bank to go for yet another rate hike, the 11th since March 2010, when it unveils the quarterly review of monetary policy on Tuesday, but the Reserve Bank of India (RBI) is unlikely to oblige them. My guess is RBI governor D. Subbarao will once again take his now-famous baby step and hike the policy rate by 25 basis points (bps) to 7.75%, raising it by 450 bps in the current rate tightening cycle.

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RBI MONETARY POLICY Samiran Chakraborty The backdrop to the Reserve Bank of India (RBI) monetary policy meeting next week is not very different from what it has been in the recent past. Inflation is clearly at an unacceptable level and growth is moderating, but not collapsing. So, it is quite likely that the policy response from RBI will be a 25 basis points rate increase to reiterate its anti-inflationary stance. However, there is considerable uncertainty over the policy trajectory going forward and hence the policy statement will be scrutinized closely for RBIs assessment of the current economic situation and any forward looking cues.

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RBI MONETARY POLICY

POLICY OF VARIOUS NATIONS

Australia Brazil Canada Chile China Czech Republic Colombia Hong Kong India New Zealand Norway Singapore South Africa Switzerland Turkey United Kingdom Inflation targeting Inflation targeting Inflation targeting Inflation targeting Monetary targeting and targets a currency basket Inflation targeting Inflation targeting Currency board (fixed to US dollar) Multiple indicator approach Inflation targeting Inflation targeting Exchange rate targeting Inflation targeting Inflation targeting Inflation targeting Inflation targeting, alongside secondary targets on 'output and employment'. Mixed policy (and since the 1980s it is well described by the "Taylor rule," which maintains that the Fed funds rate responds to shocks in inflation and output)
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United States

RBI MONETARY POLICY

RECOMMENDATION

Based on the data and opinions mentioned above, the CRR REPO mechanism adopted by the RBI has overshot its utility. No doubt, the RBI is the only authority which is empowered as well as capable to handle the situation. It is also not disputed that the monetary policy is important to fight inflation.

But the point is, is it enough.?

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RBI MONETARY POLICY

CONCLUSION The government would also have to play an important role in controlling inflation without harming the economic growth by ensuring greater transparency in the RBI's sterilization operations. The Governments at the Centre and the States should take urgent action to make available adequate credit at competitive interest rates and offer other incentives. Inflation can be contained only if supply-side and demand issues are effectively addressed, apart from initiating appropriate fiscal and monetary measures.

There is a famous dialogue from the movie the usual suspects,

which when modified describes the situation perfectly; the greatest trick the devil ever pulled was convincing the world that evil didn't exist.

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RBI MONETARY POLICY

BIBILOGARAPHY
NEWS PAPERS (day to day). TELEVISIONS. FRIENDS.

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RBI MONETARY POLICY

WIBILOGRAPHY
www.rbi.com www.topnews.com www.google.com www.24hrsnews.com

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