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Macroeconomics Case Analysis on “Trend and Reasons for RBI Credit Policy” By

India's Monetary and Credit policy is policy through which the RBI seeks to ensure price stability. The policy can be broken down into money supply, interest rates and inflation.

GDP Growth rate Trend:

India Inflation rate trend from 2001 to 2012 Repo Rate 10 9 8 7 6 5 4 3 2 1 0 Repo Rate CRR trend from 2001 to 2012: .

which rose from 5.CRR 10 9 8 7 6 5 4 3 2 1 0 CRR Repo Rate Trend from 2001 to 2012: Repo Rate 10 9 8 7 6 5 4 3 2 1 0 Repo Rate Reasons for the above trends: 1) RBI pares Bank Rate by 0. RBI Credit Policy – Current Scenario (Source: NDTV Profit Website) . 3) In 2008. CRR cut by 2% in 2001 – Revive sagging market sentiment (Low GDP at 3.1 per cent in Q3 of 2011-12.8%. Inflation at 3.51% in 2007 to 9. CRR was kept at a high of 9% in order to minimise during recession and ongoing crisis. while WPI inflation moderated significantly in March 2012. It. Repo rates were cut since Growth decelerated significantly to 6.The Reserve Bank of India surprised the money and stock markets by cutting the benchmark repo rate by 50 basis points to 8%. and warned of inflationary risks and limited room for further interest rate cuts.77%) 2) Increase in repo rate and CRR from 2007 to 2008 – To check inflation.70% in 2008. twice the 25 basis point cut that most players were expecting. however kept the cash reserve ratio unchanged.5%. 4) Drastic reduction in repo rate without changing CRR (April 17 2012) .

5%. “This suggests that factors other than interest rates are contributing more significantly to the growth slowdown. the amount of money the government borrows from RBI to meet annual expenses is likely to be 5. Budget estimates put subsidies at Rs 1.7 per cent in May largely due to a sharp increase in vegetable prices. remain comparatively lower than the levels seen during the high growth phase of 2003-08. RBI has told the government clearly that it needs to borrow less so that money can be made available for businesses to stimulate growth. both public and private. it increases the cost of borrowing for small and large businesses.5 % of GDP despite international easing oil prices..” RBI said in its statement. If the inflation rates are on the rise. according to rating agency ICRA. Slow growth not because of high interest rates alone: The high government borrowing hurts the so-called liquidity or money supply as RBI has to meet the government borrowing demand ahead of businesses. RBI estimates suggest that real effective bank lending interest rates. RBI did not alter the interest rates as a message to the Indian Government to get its house in order. .7 per cent)] in January to 10. “The consequent subsidy burden on the Government is crowding out public investment at a time when reviving investment.000 crore for 2012-13. They account for a third of the government borrowing or the fiscal deficit. Subsidies: RBI has urged the government to cut subsidies on fuel. Following factors help in understanding the same: Inflation: The Wholesale inflation rate is above 7.In its last announcement. As the government borrows more. Protein inflation continued to be in double digits.e. The fiscal deficit i.” RBI said on growth slowdown.90. though positive. is a critical imperative. the RBI cannot cut interest rates. High Government expenditure: The central government has been living beyond its means for some time now. Primary food articles inflation rose from negative [(-) 0.