monetary policy_india

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basic terminology used to describe monetary policy

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By: pradeepsonal (83 month(s) ago)

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MONETARY POLICY

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First, What the heck is Cloud Computing First, what is MONETARY POLICY?

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Monetary Policy - policy statement, through which the monetary authority of the country ( RBI ) controls

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GOAL STABLE

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RBI announces norms for the banking and financial sector and the institutions which are governed by it

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Controlling inflation Encouraging growth Financial Stability Broad Objectives : Monetary Policy

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Sub-Objectives

PRICE STABILITY:

PRICE STABILITY

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ASASAFAFASGH DFAAAAGAA CURRENT RATE OF INFLATION 6.49%

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MONEY SUPPLY - total volume of money circulating in the economy

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We now understand price stability

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CONTROLS INFLATION PRICE STABILITY

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Now we will se how RBI encourages growth

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Repo Rate - A repurchase agreement through which banks borrow money from RBI against government securities, with the stipulation that they’ll repurchase the same after a specified time which may be one day to 15 days.

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Increase in repo rate , makes the borrowing expensive from RBI

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end consumers after increase in repo rate

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REVERSE REPO RATE rate at which banks park their short-term excess liquidity with the RBI

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RBI is ready to borrow money from the banks at a higher rate  of interest Increase in reverse repo rate

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banks would prefer to keep more and more surplus funds with RBI

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I nsights into current rates DFDF DGD

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BANK RATE - minimum rate at which Central Bank provides loans to the commercial banks

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central bank rediscounts the bills of exchange to finance commercial banks RATE

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Open Market Operations (OMO)

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instrument of credit control , through the purchase and sale of securities by central bank in OMO

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Cash Reserve Ratio (CRR) Percentage of amount commercial banks have to deposit in cash at central bank

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To meet CRR requirements , banks can only use cash tool used to control liquidity in the economy.

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Current Rates

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Layoffs 2008-09 Economy is upside down Excess Capacity Bankruptcy

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Global Financial Meltdown 2008 Little impact on INDIAN ECONOMY

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The Major Shift 1991

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effects of MONETARY POLICY

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Current bank rate 6%

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Statutory Liquidity Ratio (SLR) Banks are required to maintain certain percent of their demand and time liabilities in government securities and certain approved securities, collectively known as SLR securities

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Statutory Liquidity Ratio (SLR ) tool which is used to regulate credit growth in the economy.

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SLR restricts the bank’s leverage in pumping more money into the economy Meeting SLR requirements

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Dshgdhschdsvcdgc dgchcdhbfcvhgjhsh “ Finance Minister Pranab Mukherjee would have to shoulder the primary responsibility for pulling the economy out of its current morass .” Governor of RBI D. Subbarao in his statement said :

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He added "In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending"

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Rate cuts are inevitable!! The timing will depend upon two factors:

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“ Given this vulnerability on the energy front, RBI has to be cautious about cutting rates unless inflation shows a marked downward trend”

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"India's elephantine economy will continue to lumber on, but it is unlikely you will see it dancing in 2012“ Manoj Vohra , Head of Research, South/Southeast Asia, Economist Intelligence Unit is PESSIMISTIC, saying people should not expect miracles .

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restricted by the impact of other government actions , especially Fiscal policy, i.e. decisions about government expenditures and taxation Limitations

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Cannot simultaneously stimulate economic demand to reduce unemployment and restrain demand to combat inflation

Problems of an inflexible labour market, inadequate infrastructure:

Problems of an inflexible labour market, inadequate infrastructure

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Monetary Policy cannot work in isolation !!!

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Conditions prevailing in the Economy Economic Slowdown : RBI's growth forecast for this fiscal year has reduced to 7% from 7.6%

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Current A/c deficit: 3.6% of GDP

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RBI rate cuts timing dependent on fiscal deficit In Reserve Bank of India’s third quarterly Monetary Policy statement on January 24, RBI Governor Duvvuri Subbarao took a small step towards LOOSENING MONETARY POLICY which he has been tightening for the past two years

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Steps taken:

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Scenario: Prior 1991 fgreghvrjtbvhtrhdgvbhjbdfj

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RESULTS

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REFORMS

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Instruments of Monetary Policy BEFORE 1991

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After ( in 2004 )

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Contractionary Monetary Policy

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Expansionary Monetary Policy

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Effect on stock market

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RESULT : Stock market crashes

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Scenario 2

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Business Implications

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BEFORE 1991- Get permission from the Government or RBI

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AFTER 1991 Government eased the movement of foreign currency on trade account.

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Importers and Exporters need not get permission on a CASE TO CASE basis as was prevalent in the earlier regime.

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Government liberalized the flow of foreign exchange to include items like amount of foreign currency that can be procured for purposes like travel abroad, studying abroad, engaging the services of foreign consultants etc.

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