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basic presentation on MONETARY POLICY of India
Inflation is a rise in the general price level of goods and services over time which causes money to lose value. There are different stages and types of inflation. Inflation can be caused by increases in demand, costs, money supply, wages, and other factors. While inflation has some positive effects like debt relief, it generally has negative effects on consumers, savers, fixed income groups, and the economy. The Reserve Bank of India uses various monetary policy tools like adjusting policy rates, cash reserve and statutory liquidity ratios, open market operations, and other tools to control inflation and achieve monetary policy objectives of price stability and growth.
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basic presentation on MONETARY POLICY of India
- 2. Inflation Inflation is arise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate. When Prices rise the Value of Money falls.
- 3. STAGES OF INFLATION 1. CREEPING INFLATION (0%-3%) 2. WALKING INFLATION (3% - 7%) 3. RUNNING INFLATION (10% - 20 %) 4. HYPER INFLATION (20% and abv)
- 4. TYPES OF INFLATION 1.Demand Pull Inflation 2. Cost Push Inflation
- 5. Causes of Inflation 1. Demand pull Inflation Causes for Increase in Demand a) Increase in Money Supply b) Increase in Black Marketing c) Increase in Hoarding d) Repayment of Past Internal Debt e) Increase in Exports f) Deficit Financing g) Increase in Income h) Demonstration Effect i) Increase in Black money j) Increase in Credit facilities
- 6. Cont…. 2) CostPush Inflation Causes for Increase in Cost a) Increase in cost of raw materials b) Shortage of Supplies c) Natural calamities d) Industrial Disputes e) Increase in Exports f) Increase in Wages g) Increase in Transportation Cost h) Huge Expenditure on Advertisement
- 7. Effects of Inflation Inflation can have positive and negative effects on an economy. Negative effects of inflation include loss in stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt.
- 8. Cont….. 1. Effect onProducers 2. Effect on Debtors 3. Effect on Creditors 4. Effect on Fixed Income Group 5. Effect on Wage Earners 6. Effect on Equity Holders 7. Effect on farmers 8. Effect on Production 9. Effect on Hoarding 10. Effect on value of Money 11. Effect on Investment 12. Effect on savings
- 9. What is theMonetary Policy? The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy. These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy. Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. RBI uses monetary policy tools to increase or decrease the supply of money
- 10. How is theMonetary Policy different from the Fiscal Policy? The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government. The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.
- 11. What are theobjectives of the Monetary Policy? The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.
- 12. Monetary Policy Committee The Monetary Policy Committee is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year (specifically, at least once BIMONTHLY) and it publishes its decisions after each such meeting. The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India. 1. Governor – Chairperson, Shaktikanta Das 2. Deputy Governor -in charge of monetary policy — Michael Debrata Patra 3. Executive director - in charge of monetary policy — M K Saggar 4. Ashima Goyal is a member of Prime Minister Narendra Modi's economic advisory council. 5. Shashanka Bhide is a senior advisor at the National Council for Applied Economic Research 6. Jayanth Varma is a finance and accounting professor at the Indian Institute of Management, Ahmedabad
- 13. RBI Monetary Policyhighlights
- 14. RBI Monetary Policyhighlights On 04th Jun 2021, RBI kept the Repo Rate unchanged at 4.00% and Reverse Repo rate at 3.35%. In addition to that, the Marginal Standing Facility rate and the Bank rate stands at 4.25%. This has been done to limit the damage caused to the economy by the second wave of Covid-19. Key highlights of RBI monetary policy as announced on 04th Jun 2021, are: RBI keeps Repo Rate unchanged at 4.00%. Reverse repo rate also remains unchanged at 3.35%. CRR will remain at 4.00%. MSF & Bank Rate remains unchanged at 4.25%. MPC sees CPI inflation at 5.1% in 2021-22; 5.2% in Q1, 5.4% in Q2, 4.7% in Q3 and 5.3% in Q4.
- 15. RBI Monetary Policyhighlights RBI cuts FY22 GDP growth forecast to 9.5% from 10.5% earlier. RBI to buy ₹ 40,000 Cr of govt securities on June 17; ₹ 1.20 lakh crore G-Sec to be purchased in Q2: A separate liquidity window of ₹ 15,000 Cr for the hospitality sector. Retail inflation is likely to be 5.1 per cent during the current fiscal. MPC has been given the mandate to maintain annual inflation at 4 per cent until March 31, 2026. RBI to extend a special liquidity facility of ₹ 16,000 Cr to SIDBI for on-lending and refinancing.
- 16. INSTRUMENTS OF MONETARY POLICY 1. Bank Rate of Interest 2. Cash Reserve Ratio 3. Statutory Liquidity Ratio 4. Open market Operations 5. Margin Requirements 6. Deficit Financing 7. Issue of New Currency 8. Credit Control
- 17. Bank Rate ofInterest It is the interest rate which is fixed by the RBI to control the lending capacity of Commercial banks . During Inflation , RBI increases the bank rate of interest due to which borrowing power of commercial banks reduces which thereby reduces the supply of money or credit in the economy .When Money supply Reduces it reduces the purchasing power and thereby curtailing Consumption and lowering Prices.
- 18. Cash Reserve Ratio CRR,or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits with the RBI . This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.
- 19. Statutory Liquidity Ratio Banksare required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements . If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy.
- 20. Open market Operations Itrefers to the buying and selling of Govt. securities in the open market . During inflation RBI sells securities in the open market which leads to transfer of money to RBI. Thus money supply is controlled in the economy.
- 21. Margin Requirements DuringInflation RBI fixes a high rate of margin on the securities kept by the public for loans .If the margin increases the commercial banks will give less amount of credit on the securities kept by the public thereby controlling inflation.
- 22. Deficit Financing Itmeans printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation.