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Submitted by Group 1

Aman Sachdev (12DM 016)

Amit Mantry (12DM 019) Ankit Sood (12DM 024)

Anuj Pasricha (12DM 030)

Arnav Shankar (12DM 035) Asif Ali (12DM 040)

Price Stability Controlled Expansion of Bank Credit Desired Distribution of Credit Equitable Distribution of Credit Promote Efficiency Reduce Rigidity Restriction of Inventories

Monetary Tools Open Market Operations Cash Reserve Ratio

Statutory Liquidity Ratio

Bank Rate

Repo Rate and Reverse Repo Rate


Economic Scenario

Exceptionally challenging circumstances - Crash of Lehman Brothers Focus on minimising impact Policy shifted to monetary easing Economic activity slowed during Q1 and Q2 of 2008-2009 as compared with over 9% in the previous year Sharp fall in Q3 Growth during the first three quarters of 2008-2009 - 6.9% compared to 9% during the previous year GDP Growth 2008-2009 6.7%

Table 1: Real GDP Growth (%) Q1 Sector (April-June) 2007-08 Agriculture Industry Services Overall 4.4 8.5 10.7 9.1 2008-09 3.0 5.2 10.2 7.9 Q2 (July-September) 2007-08 4.4 7.5 10.7 9.1 2008-09 2.7 4.7 9.6 7.6 Q3 (October-December) 2007-08 6.9 7.6 10.1 8.9 2008-09 -2.2 0.8 9.5 5.3 2007-08 5.5 7.9 10.5 9.0 2008-09 0.6 3.5 9.7 6.9 April-December

Source: Central Statistical Organisation (CSO).

GDP Growth Rate

9 8 7 6 5

3 2 1 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008

GDP Groth Rate

Wholesale Price Index (WPI), decelerated sharply from 12.91 per cent on August 2, 2008 to 0.26 per cent by March 28, 2009.
Table 2 : Annual Inflation Rate (%) Wholesale Price Index (WPI) 29-Mar-08 (y-o-y) WPI - All Commodities WPI - Primary Articles WPI - Food Articles WPI - Fuel Group WPI - Manufactured Products WPI - Manufactured Food Products WPI - Excluding Fuel WPI - Excluding Food Articles and Fuel 7.75 9.68 6.54 6.78 7.34 9.40 8.01 8.38 28-Mar-09 (y-o-y) 0.26 3.46 6.31 -6.11 1.42 7.51 2.01 0.95

Response to the slowdown since mid - September 2008 Repo Rate cut by 400

basis points and Reverse Repo by 250 basis points CRR reduced by 400 basis points

In response to the action by RBI banks reduced their deposit and lending rates

Reduction in the range of term deposit rates between October 2008 - April 18, 2009 - 125-250 basis points by public sector banks 75-200 basis points by private sector banks 100-200 basis points by five major foreign banks

Reduction in CRR Reduces Reserve Money Money Multiplier Rises M3 expands with a lag

Table 5: Annual Variations in Monetary Aggregates

(Per cent)
Item Annual Variations 2007-08 Reserve Money Money Supply (M3) M3 (Policy Projection) Money Multiplier 31.0 21.2 17.0-17.5* 4.33 2008-09 6.4 18.4 19.0** 4.82

*Policy projection for the financial year as indicated in the Annual Policy Statement 2008-09 (April 2008). **Policy projection for the financial year as indicated in the Third Quarter Review of Monetary Policy 2008-09 (January 2009).

Reserve Bank Actions since mid Sep 2008 - liquidity of over Rs.4,22,000 40000 Cr for credit expansion Growth in non-food bank credit (year-on-year basis) decelerated from a peak of 29.4 per cent in October 2008 to 17.5 per cent by March 2009.

Measures since mid September 2008

Repo rate was reduced by 400 basis points from 9.0 per cent to 5.0 per cent Reverse repo rate was reduced by 250 basis points from 6.0 per cent to 3.5 per cent. The cash reserve ratio (CRR) was reduced by 400 basis points from 9.0 per cent to 5.0 per cent. The statutory liquidity ratio (SLR) was reduced from 25.0 per cent of to 24.0 per cent.

The global financial and economic outlook continues to be unsettled and uncertain Assessment by major international agencies projected sharp contraction in global trade volumes in 2009 The assessments projected little chance of global economic recovery in 2009. Therefore the Reserve Bank will continue to maintain vigil, monitor domestic and global developments, and take swift and effective action to minimise the impact of the crisis and restore the economy to a high growth path consistent with price and financial stability.


Unchanged at 6% To reduce the repo rate by 25 basis points from 5.0 per cent to 4.75 per cent. To reduce the reverse repo rate under by 25 basis points from 3.5 per cent to 3.25 per cent with immediate effect. The cash reserve ratio (CRR) was retained unchanged at 5.0. Reserve Bank indicated its intention to purchase government securities under open market operations (OMO) for an indicative amount of Rs.80, 000 crore during the first half of 2009-10.

Economy was on the track of recovery, the GDP growth rate was estimated to be between 7.2% to 7.5% for 2009-2010 as against 6.7% for the year 2008-2009.
GDP Growth Rate
10 9 8 7 6 5 4 3 2 1 0 2007-08 2008-09 2009-10

GDP Growth Rate

The monetary measures initiated in the wake of the global financial crisis played an important role, first in mitigating the adverse impact from contagion and then in ensuring that the economy recovered quickly.

Wholesale Price Index (WPI), accelerated to 9.9 per cent in March 2010, exceeding the Reserve Banks baseline projection of 8.5 per cent for March 2010.
12 10 8 6 4 2 0 WPI




Monetary aggregate growth was as per the projections. Non-food credit growth recovered from its intra-year low of 10.3 per cent in October 2009 to 16.9 per cent by March 2010

Monetary Policy 2010-2011

Economic Scenario
Set against complex economic backdrop EMEs significantly ahead on the recovery curve Indias growth-inflation dynamics were in contrast to the overall global scenario Inflationary pressures: triggered by supply side factors.

GDP -7.4 % IIP growth rates

Month IIP
20 15 10






0 Dec-09 Jan-10 Feb-10

In December 2009 IIP growth rate was 17.6% In January 2010 IIP growth rate was 16.7% In February 2010 IIP growth rate was15.1

Imports expanded
Month Nov-09 Dec-09 Jan-10 Feb-10 Import 2.6 32.4 35.5 66.4
70 60 50 40 30 20 10 0 Nov-09 Dec-09 Jan-10 Feb-10

In November 2009 import expanded by 2.6% In November 2009 import expanded by 32.4 % In January 2010 import expanded by 35.5% In February 2010 import expanded by 66.4%

Projected GDP

Projected Inflation

Liquidity Condition: Surplus Bank absorbed Rs.1,00,000 crore up to Feb 12 2010 Credit Condition: Non-food credit grew: Oct 2009 10.3% March 2010 16.9% Total flow of financial resources from banks, domestic non-bank and external sources to the commercial sector during 2009-10 at Rs.9,71,000 crore (Rs.8,34,000 crore the previous year) Monetary Aggregates Money supply (M3) decelerated from 20.0 per cent to 16.4 per cent (Feb 2010) then increased to 16.7 per cent.

SLR set to its pre crisis level in Oct 2009 CRR increase by 75 basis point in Jan 2010 Due to continues increase in inflation, Repo and Reverse Repo increased by 25 basis points each Policy stance for 2010-11 was guided by the following major considerations: Recovery was consolidating- quick rebound of growth during 2009-10 despite failure of monsoon rainfall suggested that the Indian economy had become resilient and because of this pprojected growth rate of 2010-11 was higher than 2009-10. Second, inflationary pressures had accentuated in the recent period

Bank Rate : 6 percent Repo Rate : 5 to 5.25 percent Reverse Repo Rate : 3.25 to 3.75 percent CRR : 5.75 to 6 percent

Expected Outcomes
Contained inflation Sustained recovery Government borrowing requirements and the private credit demand will be met Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.

The economy continued with the momentum of late 2010, the economy was estimated to grow by 8.6% during 2010-2011

GDP growth rate

8.2 8 7.8 7.6 7.4 7.2 7 6.8 6.6 6.4 6.2 2008 2009 2010

In line with the monetary policy the year began with a tight liquidity condition. Growth slowed despite a significant increase in reserve money The monetary policy was not able to control inflation, the rising commodity prices caused inflation to grow.

Monetary Policy 2011-2012

Main goal was to facilitate recovery in the phase of global uncertainty Control supply side inflation, driven by food products Major concerns for monetary policy 2011-12 Rising global commodity price Moderation in demand Core inflation was overshot


Economic Scenario
Economy was expected to grow at 8.6% in 2010-2011(with confidence level of 90%). Inflation- divided in three periods First period (April to July)- 3.5% increase in WPI largely by food item, fuel, power group Second period (August to November)-1.8% increase in WPI largely by food and non-food primary articles and minerals Third period (December to March)-3.4% increase in WPI largely by fuel and power group and non-food manufactured products International petroleum prices were increasing which increased the price of domestic product. Input cost was rising as a result the price of manufactured goods increased

Effective lending rates- increase from 9.7 per cent in 2010-11 to 10.3 per cent in 2011-12 Increased Base Rates by 50-165 basis points between October 2010 to March 2011 Broad money (M3) growth was at 15.9% which was below the expectations of RBI i.e. 17%- slow deposit growth and acceleration in currency growth Liquidity conditions transited to a deficit mode towards end-May 2010. Reason: government built up cash reserve from spectrum auction which fell down this year. Liquidity conditions became even tighter in October 2010 above-normal build up in government cash balances high currency demand growth and credit growth outpacing deposit

Temporary waiver of penal interest for any shortfall in maintenance of statutory liquidity ratio (SLR) Reduction in the SLR by one per cent Conducting open market operations

Stance been raised by 100 basis Since 2009 the cash reserve ratio (CRR) has

Policy rates were raised by 8 time, repo rate by 200 basis points and the reverse repo rate by 250 basis points.

Inflation which remained much above the comfort level of the Reserve Bank. Sharp increase in non-food manufactured product inflation Uncertainty in global commodity prices which posed a major risk to domestic inflation Maintain an interest rate environment that moderates inflation and anchors inflation expectations. Foster an environment of price stability that is conducive to sustaining growth in the medium-term coupled with financial stability. Manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows.

Monetary Measures
Repo Rate was increased from 6.75 % to 7.25% Reverse Repo Rate was adjusts to 6.25% Bank Rate-retained at 6.0 per cent. Cash Reserve Ratio of Scheduled Banks was retained at 6.0%

Expected results
Contain inflation by reining in demand side pressures, and anchor inflationary expectations; and Sustain the growth in the medium-term by containing inflation.

GDP growth during April-December 2011 slowed significantly to 6.9 per cent from 8.1 per cent in the corresponding period of the previous year, this was not only in response to the tight monetary policy but also because of global challenges Wholesale price index (WPI) inflation, which remained above 9 per cent during April-November 2011, moderated to 6.9 per cent by end-March 2012wholesale price index (WPI) inflation
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% March2010 March2011 March2012 Inflation Rate

Inflation Rate

Money supply (M3) growth, which was 17 per cent at the beginning of the financial year 2011-12, reflecting strong growth in time deposits, moderated during the course of the year to about 13 per cent by end-March 2012, lower than the Reserve Banks indicative trajectory of 15.5 per cent, mirroring tightness in primary liquidity.