Monetary

Policy

Macroeconomic Policies

Fiscal Policy
Use of Government Expenditure, and taxation to manage
the economy.

Purpose of Fiscal Policy

Stabilise economic growth, avoiding the boom and
bust economic cycle

Variables affected by Fiscal Policy in the economy

Aggregate demand and the level of economic activity
The pattern of resource allocation
The distribution of income.

Physical Policy
Meant to affect only strategic points of the economy
Purpose of Physical Policy
Overcome specific problems such as pricing of
particular commodity, shortages or surpluses
developing in the economy etc.

Variables affected by Physical Policy in the economy

Price and distribution of specific commodity
Investment and production
Foreign Trade

Monetary Policy
Regulation of supply of Money and Cost and Availability of
Credit in the economy
Purpose of Monetary Policy
Maintain price stability, ensure adequate flow of
credit to the productive sectors of the economy and
overall economic growth
Variables affected by Monetary Policy in the economy
Interest Rates
Liquidity
Credit Availability
Exchange Rates

Monetary Policy RBIs role

Monetary Policy Terminology

Current Rates

Monetary Policy Influence

Target Variables

Policy Variables
- Money supply

-Inflation
-Interest rate
-Real GDP

- OMO: Liquidity conditions

-Employment

- policy rates (CRR, repo etc.)

-Consumption
-Savings
-Investment

CRR Movement

CRR Movement
Boost Economy after
2001 Slowdown /
dotcom bubble

Stable CRR from

2004 to 2006

Rise in CRR to control liquidity,

due to Heavy Capital Inflow &
to curb Re Appreciation

CRR hikes to
curb inflation

CRR Cuts to boost

economy after
Sub prime loss /
Global meltdown

Inflation Movement

CRR
CRR hikes
hikes proved
proved to
to
Uncontrolled
Inflation
Uncontrolled Inflation
Inflation despite
despite
Inflation Down
Down on
on accoun
accoun
Be
Be effective
effective
Further
of
Further CRR
CRR hikes
hikes
of global
global credit
credit crunch
crunch
To
To curb
curb Inflation
Inflation

http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/

SLR Movement

Banks to made available more funds

& More Efficiency

Stable SLR from

1998 onwards

Repo and Reverse Repo rates

Movement

Repo rate reduction due to make

credit available at cheaper rates Increased rates to control the liquidi

Exchange Rate Movement

Sterilization to
Control rupee
Appreciation

LAF - To Control Exchange Ratio

Outflow of $ from India Market

Forex Reserves Position

The Surge in Foreign Exchange
Reserves

Sterilization / Selling bonds

& Buying dollars
www.rgemonitor.com/blog/economonitor/248231

Sterilization under MSS

Sterilization bonds under (MSS) - April 2004

Cap. Rs.700 Cr. In 2005 & 1500 Cr. In 2007

18

Current Global Scenario

Global GDP -0.6%

Europe
Jap a
n
S
U

Tighter credit

World trade
contraction by
2.8%

Recession
Estimated PPP
Global Growth
0.5%

Production
Plunge

Demand Slump
Job losses

Aggressive and unconventional measures taken by

Governments and central banks

Impact on India
Money and credit market
Domestic
Banks
Local
Institutions
Domestic MFs

NBFC

Re

Financial Channel

20

Challenges for RBI

Growth amid
Global economic slowdown

21

Limitations Monetary Policy

Monetary Policy cannot work in isolation!!

Thank You