Monetary Policy in Action

1. Monetary Policy in Action Shrirang Shirodkar 05305007 Alok Jadhav 05305041 John Kati 05305046 Sandeep Shelke 05305402 Under the guidance of Prof. K. Narayanan

2. Agenda • Introduction • Annual Policy Statement • First Quarter Review • Mid Term Review • Third Quarter Review • Recent developments • References

3. Introduction • What is Monetary Policy? • Types of Policies • Objectives • Monetary Measures

4. Objectives • Inflation Control • Credit Growth • Employment • Price Stability • Economic Growth

5. Measures • Least Inflation Policy • Interest Rates • CRR and SLR • Monetary Base • Reserve Requirements

6. Annual Statement of Monetary Policy 2005-06 • Monetary developments in 2004-05 • GDP placed at 6.9% • Annual inflation rate stood at 5% • Money supply (M3) increased by 12.8% • Increase in non-food credit • Financial markets generally stable • Widening of trade deficit • Increased risks in global financial markets

7. Stance of Monetary Policy • Factors to be considered • Adequate credit growth needs to be ensured • Trends in capital market indicate surplus • Growth may get moderated by oil markets • Significantly higher borrowings • Heavy growth in non-food credits

8. Stance of Monetary Policy • GDP growth placed at 7% • Inflation rate at 5-5.5% • Projected expansion of M3 at 14.5% • Credit increase by 19% • Key Points • Provision of suffice liquidity for credit growth • Emphasis on price stability • Interest rate conducive to stability and growth

9. Monetary Measures • Bank rate kept unchanged at 6.0% • Reserve Repo Rate increased by 25 basic points to 5.0% • Cash Reserve Ratio (CRR) kept unchanged at 5.0%

10. Quarterly Reviews • The Annual Policy Statement, proposed quarterly reviews of Monetary Policy. • Benefit • To take specific measures as the evolving circumstances warrant. • Mainly consist, • Review of Macroeconomic and Monetary Developments in the previous quarter. • Stance of Monetary Policy for the remaining part of year.

11. First Quarter Review 2005-06 • Key Developments • Increase in index of Industrial Production. • Continued good performance of corporate sector. • Good growth in manufacturing output. • Improved level of business confidence. • Increase in credit of scheduled commercial banks . • Inflation remained on expected lines. • Oil prices in the international markets remained high. • Stance of Monetary Policy • No major change from the Annual Policy Statement. • Respond to evolving situations as per unfolding of risks.

12. Mid Term Review of 2005-06 • Monetary Developments • Oil prices in international markets remained high • Increase in overall industrial growth • Non-food credit growth high • Stance of Monetary Policy • Maintain appropriate liquidity to meet credit needs • Keep a watch on the evolving inflationary scenario • Take prompt measures, to stabilize inflationary expectations

13. Third Quarter Review 2005-06 • Monetary Developments • Money supply • Financial markets • Export growth • Risky profiles • Inflation • Stance of Monetary Policy • Price Stability • Export and Investment • Liquidity

14. Recent developments • Liquidity crunch raising concerns about the economy’s capacity to sustain the recent high-growth rates. • Banks demanding cut in the cash reserve ratio (CRR) to infuse liquidity. • RBI also exploring the possibility of releasing the excess funds maintained under the statutory liquidity ratio (SLR). • Of Late, liquidity position appears to have improved with the RBI resorting to the reverse repo window. • RBI’s purchase of foreign exchange inflows for nearly two months has also led to injection of liquidity into the system.

15. References • RBI Monetary Policy Statements • http://rbi.org.in • Indian Express (April 3, 2006)