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MACROECONOMIC POLICIES
Fiscal Policy Related to budget, government expenditure, taxation Physical Policy Related to overcoming specific problems of the economy
Monetary Policy Related to money supply, exchange rate control & bank rate control
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MONETARY POLICY
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, & iii. cost of money or rate of interest
to attain growth & stability of the economy. In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. In India, the central monetary authority is the Reserve Bank of India (RBI).
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OBJECTIVES
Price stability
the focus is to enable the developmental projects to run swiftly while also maintaining reasonable price stability
Restrictions of inventories
objective of this policy is to avoid over-stocking and idle money in the organization
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OBJECTIVES
(CONTD.)
To promote efficiency
in the financial system and to incorporate structural changes
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INSTRUMENTS
Liquidity Management
Cash Reserve Ratio (CRR), amount of money that banks must set aside with RBI against their deposits Statutory Liquidity Ratio (SLR), percentage of bank funds to be maintained in government & approved securities Open Market Operations (OMO), purchase & sale of securities in the open market
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INSTRUMENTS
(CONTD.)
Bank Rate, minimum rate at which the central bank provides loans to commercial banks Marginal Standing Facility, is the rate at which banks can borrow overnight from RBI.
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RECENT DEVELOPMENTS
In its last policy review in March, RBI slashed repo rate by 25 bps to 7.5%. Accordingly, the reverse repo rate came down to 6.5%. During the last year 2012-13, the policy repo rate was reduced by 100 bps, the SLR by 100 bps & the CRR by 75 bps. RBI announced annual monetary policy for the current fiscal on May 3. In this annual monetary policy RBI has not reduced the CRR and it remains unchanged at 4%.
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RATES
INSTRUMENT
Bank Rate CRR CURRENT
(03/05/13)
PREVIOUS
8.50% 4%
CHANGE
- 25 bps 0 bps
8.25% 4%
23% 7.25%
6.25% 8.25%
23% 7.50%
6.50% 8.50%
0 bps - 25 bps
- 25 bps - 25 bps
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Banks to make pricing policies more Will reduce wide variation in interest transparent & realistic rates on retail loans
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10
(CONTD.)
IMPACT Usage of gold in speculation to come down Aggressive sales of insurance & mutual funds to come down, misselling may reduce
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(CONTD.)
But despite the weak market foreign investors continued to invest money into Indian stocks. The reason for the slid in the market can also be partly attributed to the fall in the rate of inflation (5.96%). The major players were expecting for a cut of 50 bps in repo rate and a 25 bps cut in CRR but as RBI did not meet these expectations, there was selling in the market.
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CONCLUSION
The impact of the monetary policy largely depends on the current state of the economy. The actions undertaken in this policy review carry forward the measures put in place since Jan 12 for supporting growth and gradual moderation of inflation. Recent monetary policy, by itself, cannot revive growth. It needs to be complemented by ef forts towards easing the supply bottlenecks, improving governance & stepping up public investment, alongside continuing commitment to fiscal consolidation. Overall, the balance of risks stemming from the Reserve Banks assessment of the growth-inflation model yields little space for further monetary easing.
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