MONETARY POLICY

By
Yogen Mehta 113
Jackey Kothia 124
Kruti Killawala 112
Shabnam Kadwani 127
Alan Rego 115
Reserve Bank of India Introduction
Reserve Bank of India Structure, Working
 Monetary Policy Meaning

• The part of the economic policy which regulates the level of

money in the economy in order to regulate inflation, improve
balance of payments, increase gross national product etc.
RBI, in case of India controls the monetary policy.

• The policy statement traditionally announced thrice a year

through which RBI insures Price stability for the economy.
 April-September - Slack Season Policy
 October-March - Busy Season Policy

• RBI reserves its right to alter monetary policy from time to

time depending upon state of economy
 Monetary Policy Aims, Objectives

• Maintain price stability

• Flow of credit to the productive sector of
economy
• Stability of national currency
• Growth in employment & income
• Achieving foreign exchange stability
• Managing suitable level of investment and
savings
• Regulating rate of interest & induce higher level
of investment
• Achieving monetary equilibrium to ensure
equality between demand & supply of money
 Monetary Policy Types of Control

MONETARY
POLICY

QUALITATIVE QUANTITATIVE
CONTROL CONTROL
 Monetary Policy Quantitative Tools

• Bank Rate-The rate at which RBI extends credit to

commercial Banks.

• Cash Reserve Ratio - The percentage of bank’s deposits

which they must keep as cash with RBI.

• Statutory Liquidity Ratio - A commercial Bank has to keep a

portion of total deposits with itself in liquid assets.

• Open Market Operations

• Liquidity Adjustment Facility – Repo & reverse Repo

• MSS – Market stabilization scheme

 Monetary Policy Qualitative Tools

• Selective quality control

• Rationing of credit.

• Margin requirement

• Variable interest rate

• Regulation of consumer credit

• Licensing to ensure proper regional coverage

• They can be negative in character intended to discourage

activities which are regarded as inessential or undesirable.
 Monetary Policy Tool - Bank Rate

BANK RATE
• Banks use this rate to price their Long term loans to
individual and companies

BANK RATE = LENDING RATE = AGGREGATE MONEY EXPENDITURE = INFLATION

• This tool now not much in use and remains same

since years .
 Monetary Policy Tool – Cash Reserve Ratio

CASH RESERVE RATIO

• RBI has the power to vary this ratio and there by use it as an
instrument of Credit Control. Permissible limit is 3 to
15%(1962)
• It is essential for a bank to maintain the ratio or otherwise it
may not be able to meet the withdrawal demand of all its
depositors, and failure to do so may eventually result in failure
of the bank.

CRR = EXCESS RESERVES FOR BANK LENDING = CREDIT

EXCESS RESERVES FOR BANK LENDING = CREDIT

CRR = CURRENCY
ABSORB FOREIGN CAPITAL FLOW
 Monetary Policy Tool – Statutory Liquidity Ratio

STATUTORY LIQUIDITY RATIO

• Statutory Liquidity Ratio

• Narsimham committee recommended to reduce it at

minimum level. According to that it is should be 25%
rather than 40% this still remains unchanged.

• Khan committee suggested abolishment of SLR.

• The buying & selling of these securities laid the

foundation of the 1992 Harshad Mehta scam.
 Monetary Policy Tool – Open Market Operations

OPEN MARKET OPERATIONS

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 Rate
 Reverse Repo rate is the rate at which RBI borrows money 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.
 Monetary Policy Factors Affecting Policy

• Government agenda and development plans.

• Recommendation of Narshimham committee,Tarapore

committee and Khan committee report.

• Inflation and price situation.

• Credit and liquidity condition.

• Foreign money inflow (specially USD).

• IMF and World bank.

 Monetary Policy Equilibrium interest attained

Increase in output => Increase in transactions => Increase in money

demand

i Money supply

New Equilibrium
Interest rate

Equilibrium
Interest rate

Money demand

Hike in CRR has lead to decrease in money supply leading to spike in interest rates
 Monetary Policy Equilibrium interest (r) attained

Increase in output => Increase in transactions => Increase in money

demand

i Money supply

Equilibrium
Interest rate
New Equilibrium
Interest rate

Money demand

Cut in CRR has lead to increase in money supply leading to cut in interest rates
Monetary Policy Action Taken

RBI’s Target
Monetary Policy Action Taken

Liquidity Sucked out

Rs.47,000 Crore est.
 Monetary Policy Action Taken

CRR and PLR 2007-2008

14.00

13.00
13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.00
12.00 12.75

11.00

10.00
%

9.00

8.00

7.00 7.50 7.50 7.50 7.50

7.00 7.00 7.00
6.00 6.50 6.50 6.50 6.50
6.00 6.25
5.00
06 20
Augu Septe Octob Nove Dece Janua Febru Marc
Apr Apr May June July
st mber er mber mber ry ary h
2007 2007
CRR 6.00 6.25 6.50 6.50 6.50 6.50 7.00 7.00 7.00 7.50 7.50 7.50 7.50
PLR 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.2 13.0 12.7
 Monetary Policy Action Taken

Money Supply - M3 2007-2008

4500000.00

4000000.00

3500000.00

3000000.00

2500000.00

2000000.00

1500000.00
September
September
May
May

August
August
August

October
October

January
February
February
February
December
January
December
July
July
April
April

June
June

March
March
March
November
November

M3 = Physical currency part of bank reserves, savings a/c’s, short term and long term deposits, money/debt mutual funds.
 Monetary Policy Impact

IIP Growth Rate ( yoy, %) 2007-2008

14.0

12.0 11.5

10.0

8.4 8.2 8.5

8.0

6.0

4.0

2.0

0.0

2004-05 2005-06 2006-07 2007-08

IIP number or IIP data (Index of Industrial Production) is a measurement
which represents the status of production in the industrial sector for a given
period of time compared to a reference period of time.
Monetary Policy Action Taken

RBI’s Target 5 %
 Monetary Policy Action Taken

CRR, Repo and Reverse Repo 2008-2009

10.00

9.00

8.00

7.00

6.00

5.00
Liquidity Injected • Lehman Bros Crisis
4.00
Rs.1,60,000 Crore est. • Liquidity Crunch
3.00
07 14
Sept 10 17 Dec 02 23
02 16 30 04 11 25 Aug Nov Nov Febr Mar
April June emb Octo Octo emb Janu Janu
May May May July July July ust emb emb uary ch
er ber ber er ary ary
er er
CRR 7.5 7.7 8.0 8.2 8.2 8.2 8.5 8.7 8.7 9.0 9.0 6.5 6.0 5.5 5.5 5.5 5.0 5.0 5.0
Repo 7.7 7.7 7.7 7.7 8.2 9.0 9.0 9.0 9.0 9.0 8.0 8.0 7.5 7.5 6.5 5.5 5.5 5.5 5.0
Rev Repo 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 5.0 4.0 4.0 4.0 3.5
 Monetary Policy Action Taken

CRR and PLR 2008-2009

15.50

13.50 14.00 14.00 14.00

13.50 13.50 13.50
13.25 13.25 13.25 13.25
12.75 12.75 12.75 12.75 12.75
12.50 12.50 12.50 12.50
11.50

9.50
%

9.00 9.00
8.75 8.75
8.50
7.50 8.25 8.25 8.25
8.00
7.75
7.50

6.50
5.50 6.00
5.50 5.50 5.50
5.00 5.00 5.00
3.50
10 17 07 14 02 23
02 16 30 04 11 25 Augu Septe Dece Febru Marc
April June Octo Octo Nove Nove Janua Janua
May May May July July July st mber mber ary h
ber ber mber mber ry ry
CRR 7.50 7.75 8.00 8.25 8.25 8.25 8.50 8.75 8.75 9.00 9.00 6.50 6.00 5.50 5.50 5.50 5.00 5.00 5.00
PLR 12.7 12.7 12.7 12.7 12.7 13.2 13.2 13.2 13.2 14.0 14.0 14.0 13.5 13.5 13.5 12.5 12.5 12.5 12.5
 Monetary Policy Action Taken

Money Supply - M3 2008-2009

5000000.00

4800000.00

4600000.00

4400000.00

4200000.00

4000000.00

3800000.00

3600000.00

M3 = Physical currency part of bank reserves, savings a/c’s, short term and long term deposits, money/debt mutual funds.
 Monetary Policy Impact

IIP Growth Rate ( yoy, %) 2008-2009

14.0

12.0 11.5

10.0

8.2 8.5
8.0

6.0

4.0
2.8
2.0

0.0

2005-06 2006-07 2007-08 2008-09

IIP number or IIP data (Index of Industrial Production) is a measurement
which represents the status of production in the industrial sector for a given
period of time compared to a reference period of time.
Monetary Policy Action Taken

RBI’s Target 6.5 %

 Monetary Policy Action Taken

CRR, Repo and Reverse Repo 2009-2010

6.00
• Recovery
5.50

5.00

4.50
%

Liquidity sucked out

4.00 Rs.36,000 Crore est.

3.50

3.00
5 19
Augu Septe Octo Nove Dece Janua Marc
April May June July Febr Febr
st mber ber mber mber ry h
uary uary
CRR 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50 5.75
Repo 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 5.00
Rev Repo 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.50
 Monetary Policy Action Taken

CRR and PLR 2009-2010

13.50

12.50
12.25 12.25 12.25
11.50 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00

10.50

9.50

8.50
%

7.50

6.50

5.50
5.75
5.50
4.50 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

3.50
5 19
Augus Septe Octob Nove Dece Janua Marc
April May June July Febru Febru
t mber er mber mber ry h
ary ary
CRR 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50 5.75
PLR 12.2 12.2 12.2 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0
 Monetary Policy Action Taken

Money Supply - M3 2009-2010

5800000.00

5600000.00

5400000.00

5200000.00

5000000.00

4800000.00

4600000.00

4400000.00

M3 = Physical currency part of bank reserves, savings a/c’s, short term and long term deposits, money/debt mutual funds.
 Monetary Policy Impact

IIP Growth Rate ( yoy, %) 2009-2010

14.0

12.0 11.5
10.5
10.0
8.5
8.0

6.0

4.0
2.8
2.0

0.0
2006-07 2007-08 2008-09 2009-10
IIP number or IIP data (Index of Industrial Production) is a measurement
which represents the status of production in the industrial sector for a given
period of time compared to a reference period of time.
Monetary Policy Action Taken

RBI’s Target 7.5 %

 Monetary Policy Action Taken

CRR, Repo and Reverse Repo 2010-2011

7.00

6.50

6.00

5.50

5.00
%

4.50

4.00
• High Food inflation
3.50
• IIP Slowing a tad
3.00
02 30 Septe Octobe Novem Decem Januar Februa
May June July August
April April mber r ber ber y ry
CRR 5.75 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00
Repo 5.25 5.25 5.25 5.25 5.62 5.62 6.00 6.00 6.25 6.25 6.50 6.50
Rev Repo 3.75 3.75 3.75 3.75 4.25 4.25 5.00 5.00 5.25 5.25 5.50 5.50
 Monetary Policy Action Taken

CRR and PLR 2010-2011

13.00

12.00
12.00 12.00 12.00 12.00
11.00

10.00

9.00 9.50
9.00
%

8.00 8.50 8.50 8.50

8.00 8.00 8.00
7.00

6.00
6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00
5.75
5.00

4.00
02 30 Septe Octobe Novem Decem Januar Februa
May June July August
April April mber r ber ber y ry
CRR 5.75 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00
PLR 12.00 12.00 12.00 12.00 8.00 8.00 8.00 8.50 8.50 8.50 9.00 9.50
 Monetary Policy Action Taken

Money Supply - M3 2010-2011

6400000.00

6200000.00

6000000.00

5800000.00

5600000.00

5400000.00

5200000.00

M3 = Physical currency part of bank reserves, savings a/c’s, short term and long term deposits, money/debt mutual funds.
 Monetary Policy Impact

IIP Growth Rate ( yoy, %) 2010-2011

12.0

10.5
10.0

8.5 8.3
8.0

6.0

4.0
2.8
2.0

0.0
2007-08 2008-09 2009-10 2010-11

IIP number or IIP data (Index of Industrial Production) is a measurement

which represents the status of production in the industrial sector for a given
period of time compared to a reference period of time.
Monetary Policy Changed Stance
Monetary Policy Real Estate Stance
Monetary Policy Real Estate Stance
 Real Estate Stance Steps Taken by RBI

• Loan-to-value ratio lowered to 80% from 85%

• Standard asset provisioning requirements increased to 1% from
0.40% for all teaser home loan rates
• Increased Risk Weight for residential housing loans of Rs. 75
lakhs & above to 125%
• Total exposure of UCBs to realty sector restricted to 15% of their
total deposit
Real Estate Stance Impact
Monetary Policy RBI in Growth-Inflation Fix