Gunjan Agrawal, 1st Sem

Monetary policy is the process by which the government, central bank, or monetary authority of a country
controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order
to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory
provides insight into how to craft optimal monetary policy.

Statutory Liquidity Ratio : Statutory Liquidity Ratio or SLR refers to the amount that all banks require to
maintain in cash or in the form of Gold or approved securities. The SLR is commonly used to
contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing
or increasing the money supply in the system respectively.

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to
increase the percent of this, the available amount with the banks comes down. RBI is using this method
(increase of CRR rate), to drain out the excessive money from the banks. With the hike in CRR, the
prospective borrower is hit the worst, because of higher interest rates.

Bank rate is the rate at which RBI gives to the commercial banks. Whenever RBI increases its rates, the
effect will be shown on the commercial banks. In this case, the commercial banks have to increase the
interest rates for their profits.

Repo rate : Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the
rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at
a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

Reverse Repo : It is the rate at which the RBI borrows from banks. Banks are always happy to lend money
to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause
the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be
drawn out of the banking system.

Rates:

Raises statutory liquidity ratio by 100 bps to 25%

Keeps other key rates unchanged

Repo rate retained at 4.75%; reverse repo at 3.25%

Cash Reserve Ratio kept at 5%

Gunjan Agrawal, 1st Sem

Bank Rates same at 6%

Provisioning requirement for realty up at 1% from 0.40%

Growth:

Retains GDP growth projection for FY'10 at 6%

Weak monsoon can impact overall economic prospects

Poor farm output may affect industrial and services sectors

Industrial production may revive further in coming months

Growth in trade-related services such as cargo decelerating

Domestic services communication, construction turning up

Direct impact of fiscal stimulus waning

Indirect impact will persist for some more time

External demand remains weak, hitting exports.

Inflation:

Ups inflation projection to 6.5% pc by March-end, from 5%

Aims to contain inflation at 4-4.5%

Prices of food items risen due to short supply

Large increase seen in prices of vegetables, sugar, etc

Asset prices like stocks, realty, commodity have risen sharply

Others:

Managing large govt borrowings a major challenge for RBI

Non-food bank credit declines sharply

Gunjan Agrawal, 1st Sem

Non-bank credit to commercial sector turning around

Credit flow to agri, real estate, NBFCs remain high.

Credit flow to housing low

Implications

The status quo on policy rates would anchor interest rate expectations that could spur investment demand.
There are signs of revival in the domestic economy and credit demand is expected to pick up.

The large domestic demand bolstered by the government consumption, provision of forex and rupee liquidity
coupled with sharp cuts in policy rates, a sound banking sector and well-functioning financial markets helped
cushion the economy from the worst impact of the crisis. There are now progressive signs of recovery in
India: food stocks have increased; industrial production has turned positive; corporate performance has
improved; business confidence surveys are optimistic; leading indicators show an upturn; interest rates have
declined; credit off-take has picked up after May 2009; stock prices have rebounded; the primary capital
market has witnessed some activity; and external financing conditions have improved. On the other hand,
there are some negative signs: delayed and deficient monsoon; food price inflation; rebound in global
commodity prices; continuing weak external demand; and high fiscal deficit.

Liquidity is up. Rupee liquidity, dollar liquidity.

Because of ample liquidity, the pressure on banks to reduce lending rates has increased.

The stance of monetary policy is to:

* Manage liquidity actively so that the credit demand of the Government is met while ensuring the flow of
credit to the private sector at viable rates.

* Keep a vigil on the trends and signals of inflation, and be prepared to respond quickly and effectively
through policy adjustments.

* Maintain a monetary and interest rate regime consistent with price stability and financial stability supportive
of returning the economy to the high growth path.