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RBI-CREDIT POLICY

AND FOREIGN INVESTMENT


& IPL
RBI is established on 1 April 1935 under Reserve Bank Of India Act 1934
Objective
To maintain price stability and ensuring adequate flow of credit in the
economy.
Role of RBI in Economic Development
1.) Development of banking system
2.) Development of FI
3.) Development of backward areas
4.) Economic growth
5.) Proper interest rates structure

Role of RBI
1.) Note issuing authority:- The RBI has the sole right of issuing currency
notes which is its basic function too, other than one rupee notes and coins
because these are issued by govt of India.
2.) Govt Banker:- The RBI is the banker to the central as well as to the
state govt.It provides all banking services such as acceptance of
deposits,withdrawl,making payments, collecting payments, transfer of funds
and management of public debt.
3.)Act as a bankers bank:-It is called bankers bank because it holds a part
or whole reserve with the RBI so in time of need the bank borrows funds
from RBI.RBI is the ultimate source of money and credit in India
4.) Act as a supervising authority:- The RBI has vast powers
i.) to issue licenses for the establishment of new banks
ii.) to issue licenses for the setting up of new bank branches
iii.) to inspect the working of bank branches in India as well as abroad in
respect of their organization set up, branch expansion, mobilization of
deposits, investment
iv.) to control methods of operation of banks
vi.) to control appointments, termination of chief executive and chairman of
private sectors.
5.) Exchange control:-Essential function of RBI is to maintain stability of
the external value of the rupee and for this task of RBI is
I.) to choose the exchange rate system and fix or manage the exchange
rate between the rupee and other currency
ii.)to interact with monetary authorities and other countries and with
international FI such as IMF,ADB,World Bank
6.) Promoter of Financial system:- RBI has rendering its services which
have strengthen the country banking and financial structure
India is suffering from a number of economic problems
1.) Inflation( Fall in the purchasing power of money) Supply stock
inflation caused due to adverse change in price of raw material
2.) Cut throat competition
3.) Capital inflows in the market
Therefore RBI has announced its new credit policy by announcing hike
in key rates to fight Inflation without affecting economic growth to solve
the above problems. The RBI is confident that inflation will be reduced
to 5.5 percent because inflation and the economy both influence all the
major macro economic indicators of a country i.eConsumer price
indices, Industrial production, Capital Investment, Agricultural
production,GDP, Export, Import, debt and also affects the living
standards of the people .Here some are the highlights and significant
measures of the new Credit Policy 2010-11 presented by Reserve
Bank of India in order to tackle the spiraling inflation.
1.) Repo rate has been increased from 5.00% to 5.25%:
Repo Rate
It is the short-term rate at which the Reserve Bank of India (RBI) lends
cash to banks or Repo rate is the rate at which our banks borrow
rupees from RBI. This facility is for short term measure and to fill gaps
between demand and supply of money in a bank .A reduction in the
repo rate will help banks to get money at a cheaper rate.
2.) Reverse Repo rate has been increased from 3.50% to 3.75%:
Reverse Repo Rate
Reverse Repo rate is the rate which is paid by RBI to banks on
Deposit of funds with RBI.
3.) Cash Reserve Ratio increase by 25 basis points from 5.75% to
6.00%.
Cash Reserve Ratio
CRR is the proportion of deposits banks must keep with the Reserve
Bank in cash or Cash reserve Ratio (CRR) is the amount of Cash
(liquid cash like gold) that the banks have to keep with RBI.
4.) Annual inflation rate projection at 5.5 percent.
5. )Money supply to grow at 17 percent in 2010-11.
The other highlights of the monetary policy are as follows
1.Bank rate unchanged at 6 percent .
2. Statutory Liquidity Ratio (SLR) has been left unchanged at 25.00.
Statutory Liquidity Ratio
SLR is that amount which a bank has to maintain in the form of cash, gold
or approved securities or SLR is the proportion of deposits that banks must
invest in government securities.
3.)RBI projected GDP to grow 8% for the year 2010-11
4.)WPI inflation for march 2011 is expected to be placed at 5.5%
5.) Money supply growth is projected 17% and non food credit is
anticipated to grow by 20% in 2010-11
6.) RBI has focussed to maintain liquidity in system to complete the govt
borrowings programmes.
The move has been taken to control the inflation by increasing the interest
rates without choking growth. This policy believes that it would bring many
changes to sustain inflation because inflation now a days is around 10%
and economy is growing at 7% only.
Thus, Credit policy mainly focus on:-
1.) Rise in interest rates to tone down the inflation
2.) To maintain liquidity in the market
3.) To tighten the money supply so that inflation rate come down to single
digit in next 6 months.

The most well known measures of Inflation are the CPI which measures
consumer prices, and the GDP deflator, which measures inflation in the
whole of the domestic economy
India's food inflation rate rose to 17.65 per cent in the year to April 10 from
17.22 per cent while fuel prices were up 12.45 per cent from a year ago
Government has been concerned about the rising prices of food products
after the worst monsoon in more than three decades last year and floods in
some states adversely affected the Kharif crop ostensibly because of bad
monsoon rains last year and lower agricultural output. Some observers
have suggested however that the high rate is due to speculation and poor
infrastructure India’s annual rate of inflation, based on the wholesale price
index, rose to 9.89 percent in February from 8.56 percent in the previous
month Indian economy is showing signs of recovery since Q3 FY09 led

by fiscal and monetary measures taken by government and RB I.


The deficient monsoon rainfall and drought conditions in several parts
of the country have accentuated the pressure on food prices, pushing
up the overall inflation rate – both of the WPI and consumer price
indices (CPIs By increasing the Repo rate and CRR, liquidity might be
freeze for shorter period, but it will increase cost of credit and output
which inflates the GDP value. Inflation in non food manufactured
products increased from –o.4 % in November last to 4.7 percent in
March this year.
According to the RBI, three major uncertainties could the outlook
for inflation:
First - The prospects and behavior of the monsoon this year
Second - The continuous volatility in crude prices which affect almost
all sectors of the economy.
Third - Evidence of demand side pressures building up

It is believed that the new policy would bring many changes and the
primary focus of the RBI’s policy would be how quickly it could bring
down the inflation, especially non food inflation.
EFFECTS
The economy can be influenced easily by interest rates. When interest rates
are high, people do not want to take loans out from the bank because it is
more difficult to pay the loans back, and the number of purchases of cars
and homes goes down. The effects of a lower interest rate on the economy
are very beneficial for the consumer. When interest rates are low, people
are more likely to take loans out of the bank in order to pay for things like
houses and cars When interest rates increase, though, foreign investment
can increase because people outside of the country want a larger return for
their investment and they are more likely to get it in a state of high interest
rates. This causes more demand for the dollar, driving up its value in the
international market. The opposite happens, though, when the interest rates
are decreased. Interest rates control the flow of money in the economy.
High interest rates curb inflation, but also slow down the economy. The
strong rupee appreciation has already started worrying the export sector
There is no doubt that recovery is now firmly in place .other effects
1.) Effects on production. 2.) Effect on income distribution. 3.) Effect on
consumption and welfare
How RBI new credit policy affects the economy
1.) Increase in interest rates have a impact on the economy, the common
man is badly affected by high inflation rate and low return on his savings
2.)Increase in the cost of borrowings, it also affects the economy because
loans for various purposes become expensive.
3.)Increase in interest rates increases the value of dollar.
4.) Increase in interest also affects consumers because they cannot be
able to take high loan facility.
5.) High interest increases the govt debt interest payments. Because govt
is dependent on borrowings from market
6.)Reduce confidence i.e. if there is rise in interest rates it discourages
investments.
7.) In India interest rates have been slowly hiked to contain inflation which
attracts foreign investors to invest their funds but this hike in interest rates
may further increase the dollar inflow which lead to fall in the value of
dollari.e less than Rs.44 which ultimately affects our exports. If exports are
low then industrial growth also decline because 12% of production is
exported.
Impact analysis
1.) GDP growth:-RBI projection of 8% appears to be attainable only if
monsoon is normal this year and industry continuous to grow rapidly.
In 2009-10 GDP growth was stable despite monsoon failure due to
resurgence in industries. So RBI credit policy says that industries have
to register a high growth rate this year to propel push) the economy
forward
2.)Inflation:- RBI projection of 5.5% WPI for FY 2011 appears to be
very moderate and will be supported by two phenomena
i.) High base year effect
ii.) Decline in food prices
Two components of WPI is under pressure this year i.e. manufactured
goods prices and fuel
3.) Liquidity:- The surplus funds available with the bank can be used to
finance the govt borrowings programmes(1.19 lakh cr) and for this RBI
is planning to raise 2.87 lakh cr during the first half year. Last year
during first half 43% increase in deposits were seen while 20% of credit
was ascertained. If same is happen in this year then it would have
great pressure on the liquidity.
4.) Interest rates:- The impact of RBI credit policy on interest rates is
seen both negative as well as positive. Positive in the sense that RBI
has raised interest to fight inflation and high liquidity in the market but
in its another way interest rates has a negative impact because the
consumer have to pay more for taking loan.
5.) Equity market:- The hike in rates of 25 bps across repo,reverse
repo,CRR has been welcomed by the equity markets when the policy
has been announces because the hike in rates will definitely increase
the cost of funds for banks and same is unlikely to be passed on to the
consumers immediately results in weak credit growth and ample
liquidity in the banking system
TRENDS IN Monetary
indicators
Indicators April July Oct Jan April
09 09 09 2010 2010
1.) Money supply 18.9 20 18.9 16.5 16.8
2.)CRR 5 5 5 5 6
3.) Repo rate 5 4.75 4.75 4.75 5.25
4.)Reverse repo 3.5 3.25 3.25 3.25 3.75
rate
5 SLR 24 24 25 25 25
6.)Industry 28.1 21.2 17.9 14.2 20.1
FORECASTS TO CONTROL
Macro Indicators FORECAST

1.) GDP 8%
2.)Inflation 5.5%
3.)Money Supply 17%
4.) Non Food Credit 20%
Growth
Suggestions
1.) The repo and reverse repo rates should be reduced to
inject high liquidity in the market.
2.) Likewise interest rates and lending rates needed to be
revised again and lowered which help manufacturer as well
as industries to reduce their cost which results in more
exports.
FOREIGN INVESTMENT AND IPL
The Indian Premier League is an cleverly conceived and specularly
executed show. As controversies engulf the IPL's Kochi franchise, acts
of wrong doing are becoming evident by more than one party.
The Franchise Agreement does have a confidentiality clause, which
prohibits disclosure of the agreement, other than as might be required
under the law, without the prior written agreement of both parties. The
IPL draws heavily on public resources, not only for security purposes,
but also in terms of tax exemptions and tariff concessions. There is an
undeniable public interest in requiring consortiums bidding huge
amounts for cricket franchises to disclose to the public their funding
sources.
A Kochi consortium co-owner has argued that Mr. Modi offered the
owners $50 million as a 'bribe' to withdraw from the bid after they had
won it. The IPL Chairman has strenuously denied this. Actually, the
original invitation to tender for ascertaining the two
new franchises was cancelled after BCCI president Shashank Manohar
found that stiff clauses involving binding financial obligations were
included without the IPL governing council's approval. The two
franchisees — Rendezvous Sports World Limited which clinched Kochi
and business conglomerate Sahara which bagged the Pune franchise
— have committed more money than that put in by the combined bids
of the eight existing franchisees in the auctions held when IPL was
launched two years ago. the two new successful bids are worth a
whopping Rs 3,235 crore against a total value of Rs 2,840 crore for the
eight existing teams.
THANK YOU