Monetary Policy in India

Introduction

Established under the Reserve Bank of India Act, 1934 on April 1, 1935 Initially, a private shareholders' bank with capital of Rs. 5 crore Nationalised in 1949 Central Board of Directors 20 members Four Local Boards 5 members each
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Major Functions of RBI

Monetary Policy Function Supervision and Regulation Function Payment System Policy and Oversight Function Management of forex reserves, including gold Issue of Currency Function Banker to banks and Lender of Last Resort Management of Government Debt Function Banker to Government

Monetary Policy
Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit with the aim of achieving optimum levels of output and employment, price stability, balance of payments equilibrium, and any other goal set by the state.

Preamble of the RBI Act, 1934

Preamble of the Act: 'to regulate the issue of

Bank notes and keeping of reserves with a view to securing monetary stability in India and generally, to operate the currency and credit system of the country to its advantage'.

No explicit mandate for price-stability or formal inflation targeting Evolved to include macro-economic and financial stability
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Monetary Policy in India

Monetary Policy Framework Features of Monetary Policy

Monetary Policy Framework.

Objectives
Maintaining Price Stability Ensuring availability of adequate credit to support growth Maintaining financial stability Relative emphasis modulated as per the prevailing circumstances Articulated in the policy statements

Monetary Policy Framework...

Monetary Targeting Approach (till 1997-98) Multiple Indicator Approach (from 1998-99) Money Supply, Interest Rates, Credit, Exchange Rate, Inflation Rate, Fiscal Position, Trade & Capital Flows, Real Output Developments. Operating Target - Switch from Reserve Money to Overnight Interest Rate Market-based Exchange Rate Management
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Monetary Policy Framework...

Multiple Indicator Approach
Juxtaposing

High-frequency data Interest rates/rates in financial markets Medium-frequency data Currency, Inflation rate, Money Supply, Credit, other banking data Low-frequency data - Fiscal position, Trade & Capital Flows, Real Output Developments.
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Monetary Policy Framework...

Instruments

Direct

Cash Reserve Ratio (CRR) Statutory Liquidity Ratio

Direct Credit Controls

Refinance

Indirect

Open Market Operations (OMO)

- Outright Sales/Purchase - Repo Operations as under Liquidity Adjustment Facility (LAF)

-- Market Stabilisation Scheme (MSS)
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Interest Rates (Bank Rate)

Monetary Policy Framework

Operating Procedure: Shift from Direct to Indirect Instruments Reduction in Sector-specific Refinancing and CRR/SLR Recent Changes Liquidity Adjustment Facility (LAF) since June 2000 OMOs Role of Bank Rate Sterilisation Operations Market Stabilisation Scheme since 2004 Exchange rate operations with emphasis on reserves adequacy
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Behaviour of Daily Call, Repo, CBLO Rates

Chart:Behaviour of Call, Repo, Reverse Repo & CBLO

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Call Rate*

Repo

Rev. Repo
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-50000 50000 0

-100000 100000 150000 200000

Liquidity Management

Net LAF MSS GOI Cash Balances Call Rate

Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09

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Features of Monetary Policy

A Technical Advisory Committee constituted in July 2005 to advise Reserve Bank on Monetary Policy. Till 2004-05: Announced Twice by RBI
- April May: Annual Policy - October November: Mid-term Review

From 2005-06: Additional Quarterly Reviews in July and January. Annual Policy & Mid-term Review presented in the meeting with bankers and Quarterly reviews released to the Press till 2008. From January 2009: Quarterly Reviews presented in the meeting with bankers. Dates are being pre-announced since 2005-06.
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Features of Monetary Policy

Institutional Framework

Formulation Stage
Inter-departmental Working Groups Inter-agency Committees Technical Advisory Committee on Monetary Policy

Implementation Process

Monetary Policy Strategy Group Financial Markets Committee (FMC)

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Features of Monetary Policy

Structure of Monetary Policy Announcements Part I - Macroeconomic and Monetary Developments - Stance of Monetary Policy - Monetary Measures Part II - Developmental and Regulatory Policies (only in Annual Policy & Mid-term Review)

All the monetary policy documents are accompanied by a technical and analytical review of macroeconomic and monetary developments, issued as a separate document on the previous day.
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Thank You!

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