Monetary Policy 2013-2014

Monetary Policy

process by which monetary authority of a country (central bank) - RBI controls the supply of money in the economy exercising its control over interest rates to maintain price stability and achieve high economic growth.

Objectives of the monetary policy of India

Price Stability Controlled expansion of Bank Credit Promotion of Fixed Investment Restriction of Inventories Promotion of Exports and Food Procurement Operations Desired Distribution of Credit Equitable Distribution of Credit To Promote Efficiency Reducing the Rigidity

Major Monetary Operations

Open Market Operations Cash Reserve Ratio Statutory Liquidity Ratio Bank Rate Policy Credit Ceiling Credit Authorization Scheme Moral Suasion Repo Rate and Reverse Repo Rate

Background for cut in interest rate

A drop in the inflation rate to its lowest in more than three years in March ,boosted expectations the central bank would cut interest rates to help the economy recover from its slowest growth in a decade. The government's hefty cash holdings, parked at the central bank, may soon be deposited at commercial banks, a move that would add liquidity to the banking system and make monetary policy more effective by making it easier for banks to cut lending rates. India pitched for a rating upgrade at a meeting last week with ratings agency Standard & Poor's, citing steps taken by it to control a high fiscal deficit and

The country's worst economic slowdown in a decade has bottomed out and growth is expected to pick up to 6.4 percent in the current fiscal year Exports fell 1.8 percent in the 2012/13 fiscal year, but they were up for the third straight month in March, offering some relief to the record current account deficit. However, a parliament deadlocked yet again over corruption scandals threatens Finance Minister P. Chidambaram's ambitious reform agenda, dealing a harsh dose of political reality on the heels of his North American roadshow to sell the India story.

RBI governor - Duvvuri Subbarao cut the repo rate by 25 basis points to 7.25%. (Repo is the rate at which banks borrow from the central bank). reverse repo (rate at which banks park excess liquidity with the RBI) stands at 6.25 percent. Bank rate stands at 8.25%.

RBI cut its policy interest rate by 25 basis points for the third time since January, as expected, as growth slows and inflation ebbs. trimmed the repo rate to 7.25 percent (lowest since May 2011

cash reserve ratio (CRR) for banks unchanged at 4 percent. RBI believes on Open market operation than CRR cuts for maintaining liquidity.

limited room to ease monetary policy further as headline inflation remains above comfort levels. RBI pegs economic growth for current fiscal at 5.7 percent

growth to remain subdued in first half of FY14. Economic activities expected to show only modest improvement. Industrial activity remains subdued Inflation will remain around 5.5 percent level in 2013-14

5 percent WPI inflation by March 2014

RBI investigations revealed need for better regulatory compliance by banks. Advise banks to ensure transparent pricing of loans

FY14 Bank credit growth projection at 15 percent

Biggest risk to economy - Current Account Deficit.

Public investment, governance needs improvement from government side Food inflation to add further pressure to inflation management RBI proposes doubling of priority sector lending limits to MSMEs to Rs 5 crore.

Major Losers

Tata Motors (down 3.8 percent) SBI (down 3.6 percent), ICICI Bank GAIL Bajaj Auto

Major gainers

Jindal Steel Hindalco Tata Steel Sun Pharma Sterlite

After RBI announcement:The Sensex was down 65.30 points at 19670.47 Nifty fell 16.45 points at 5982.90. 851 shares advanced 805 shares declined 113 shares remain unchanged.

Banks have considerable amount of liquidity buffer in the form of bonds which are eligible for meeting statutory liquidity reserve needs- RBI. Banks will not reduce the interest rate even though there is a cut in the policy rates. If reduced, deposit schemes will shed further attractiveness. banks cannot cut lending rates alone as net as there would be difference between interests earned and paid out.

May not be any easing in home loans & auto loans. banks were asked to stop differential pricing of loans for different customers without any clear and valid reasons. RBI projected deposit growth - 14 % loan growth -15 % in FY14.