CURRENT MONETARY POLICY

As per the monetary policy review: March 2011 On the basis of the macroeconomic assessment, there has been an: Increase the Repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.75 per cent with immediate effect; and Increase the Reverse repo rate under the LAF by 25 basis points from 5.5 per cent to 5.75 per cent with immediate effect. The Bank rate has been retained at 6.00 percent. The Cash reserve ratio of scheduled banks has been retained at 6 per cent The Statutory liquidity ratio stands at 24 per cent 2011-03-21, ECONOMIC TIMES Tight money policy to moderate growth in 2011 Growth prospects good for India in 2011

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1. Trends in repo rate

2. Trends in cash reserve ratio

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3. Trends in statutory liquidity ratio

SLR
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1985 1990 1995 2000 2005 2010 2015

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4. Inflation Rates

5. Inflation Rate Changes

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RESERVE BANK OF INDIA

It is the RBI that lays down the monetary policy. It was inaugurated in April 1935 with a share capital of Rs. 5Cr. The government of India held Rs. 2,22,000. It was nationalized in 1949.

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Monetary Policy
Is a regulation of a central bank or any regulatory authority, that ascertains the size and growth rate of the money supply. Monetary policy directly influence the interest rates which in turn has a negative relation with the price level. In the face of inflation the central bank of the country generally resorts to a rise in the cash reserve ratio, repo rate and reverse repo rate. So the basic idea is to reduce the money supply in the economy. To this end government securities are also issued so as to mop up the excess money supply from the mass. This would reduce aggregate demand . This reduction would again help reduce the price level. Monetary policy also regulates the interest rate, availability of credit and at the same time promotes the overall economic growth of a country. Monetary policy facilitates establishing trade relationships with other countries. Major weapons of monetary policy: i) Credit Control a) General Credit Controls b) Selective & Direct Credit Controls

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I. General Credit Controls

Since 1955-56 and after 1973-74 the inflationary rise in prices have been steadily mounting. Shortfalls in production and hoarding and speculation in essential commodities have contributed to this inflationary pressure. Its major weapons are as follows. 1. Bank Rate It also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Initially it stood at 3% Was changed for the first time in November 1953 to 3.5%. It rose to 10% in July 1981 and remained constant for another 10 yrs (1981-91) Why is role of Bank Rate limited in India? The structure of interest rates is administered by RBI- they are not automatically linked to the bank rate. The commercial banks enjoy specific refinance facilities and not necessarily rediscount their eligible securities with RBI at bank rate. The bill market is under developed and the different sub markets of the money market are not influenced by it

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2. Cash Reserve Ratio (CRR) The CRR refers to the liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a certain percentage of their demand and time liabilities. Initially it was 5% against the demand deposits and 2% against time deposits. Since 1962 RBI was empowered to vary the cash reserve requirement between 3% & 15% of the total demand and time deposits. It rose from 3 to 7% in September 1973. 3. Statutory Liquidity Ratio (SLR) SLR is the amount of liquid assets, such as cash, precious metals or other approved securities, that a financial institution must maintain as reserves other than the Cash with the Central Bank. All banks had to maintain their SLR at 25% of the total demand and time deposit liabilities. Objectives of SLR are: To restrict the expansion of bank credit. To augment the investment of the banks in Government securities. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India.

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4. Open Market Operations It is the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.

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II. Selective & Direct Credit Controls

The RBI uses three kinds of selective credit controls: Minimum margins for lending against specific securities. Ceiling on the amounts of credit for certain purposes. Discriminatory rate of interest charged on certain type of advances

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CREDIT AUTHORISATION SCHEME Under this scheme the , the commercial banks had to obtain RBIs authorization before sanctioning any fresh credit of Rs. 1 Crore or more to any single party. This was later raised to 6 crores in April 1986. The cut off point for all the manufacturing units and the exporters was raised to Rs. 7 Crores CAS was further liberalised in july 1987 to allow for greater access to credit to meet the genuine demands in production sectors without the prior sanction of RBI One of the major step taken by RBI was to abolish CAS in october 1988

CREDIT MONITORING ARRANGEMENT RBI monitored and scrutinised all sanctions of bank loans through CMA exceeding (i) Rs. 5 crore to any single party for working capital requirement (ii) Rs. 2 crores in the case of term loans Over 930 parties are under CMA.

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INFLATION
It may be defined as an increase in the general level of prices for goods and services. As a consequence ,the purchasing power of money will fall. Most of the countries in the world try to sustain an inflation rate between 2 and 3 percent. Inflation lowers the rate of savings and diminishes the purchasing power. Inflation takes place, when too much money is in circulation in comparison with the production of goods and services. MEASUREMENT OF INFLATION: Inflation is evaluated by changes in the CPI (Consumer Price Index). It is essential to know the changes of absolute price and relative price, at the time of determining the inflation rate. The GNP (Gross National Product) is also considered while evaluating the inflation of a country. CAUSES OF INFLATION: The main cause behind inflation is the increase of money supply than the demand for money. Alternatively, it can be said that when the supply of money per unit of output increases, inflation occurs. The supply of money per unit of output increases, when "velocity" of money circulation increases. The demand for money depends on the overall economic activities of a country.
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MONETARY POLICY AND INFLATION: They are closely related concepts wherein the monetary policy can be used efficiently to reduce the effect of the inflation. Inflation is thought of as the rise in prices and wages that reduces the purchasing power of money. Monetary policy is the regulation adopted by the central bank, currency board or other regulatory authority which stabilizes the prices and maximizes production and employment of the country.

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Effect Of Monetary Policy

1.Control inflation 2.Interest rate 3.Business cycle 4.Spending 5.Employment

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1. RAISE REPO, REVERSE REPO RATES BY 25 BASIS POINTS EACH Most analysts and market participants expect the RBI to raise rates by 25 basis points, continuing with its stance of gradual policy tightening. A quarter percentage point rate hike would signal the central bank's discomfort over inflation as well as its intention not to hurt growth momentum. With that outcome already factored in by markets, the accompanying statement will be closely watched by bond and money market investors. Many dealers expect a dovish statement from RBI Governor D. Subbarao given that inflation is easing and certain downside risks to growth are also emerging PROBABILITY: MOST LIKELY 2. REPO, REVERSE REPO RATES RAISED 50 BASIS POINTS EACH Very few analysts expect the central bank to act so aggressively. But, the RBI might justify the move if it expects inflation to remain above its projected 7 percent level for March end and longer and is confident about robust growth momentum. PROBABILITY: LEAST LIKELY

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Bibliography
www.wikipedia.com www.rbi.org.in www.reuters.com Indian economy by Ruddar Dutt & K.P.M.Sundharam www.moneycontrol.com www.ndtv.com

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