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MONETARY POLICY IN ACTION

Shrirang Shirodkar 05305007Alok Jadhav 05305041John Kati 05305046Sandeep Shelke 05305402

Under the guidance ofProf. K. Narayanan

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Agenda

Introduction

Annual Policy Statement

First Quarter Review

Mid Term Review

Third Quarter Review

Recent developments References

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Introduction

What is Monetary Policy?

Types of Policies

Objectives

Monetary Measures

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Objectives

Inflation Control

Credit Growth

Employment Price Stability

Economic Growth

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Measures

Least Inflation Policy

Interest Rates

CRR and SLR Monetary Base

Reserve Requirements

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Annual Statement of

Monetary Policy 2005-06 Monetary developments in 2004-05

GDP placed at 6.9%

Annual inflation rate stood at 5% Money supply (M3) increased by 12.8%

Increase in non-food credit

Financial markets generally stable

Widening of trade deficit

Increased risks in global financial markets

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Stance of Monetary Policy

Factors to be considered

Adequate credit growth needs to be ensured

Trends in capital market indicate surplus Growth may get moderated by oil markets

Significantly higher borrowings

Heavy growth in non-food credits

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Stance of Monetary Policy

GDP growth placed at 7%

Inflation rate at 5-5.5%

Projected expansion of M3 at 14.5% Credit increase by 19%

Key Points Provision of suffice liquidity for credit growth

Emphasis on price stability

Interest rate conducive to stability and growth

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Monetary Measures

Bank rate kept unchanged at 6.0%

Reserve Repo Rate increased by 25 basic

points to 5.0% Cash Reserve Ratio (CRR) kept unchanged at

5.0%

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Quarterly Reviews

The Annual Policy Statement, proposedquarterly reviews of Monetary Policy.

Benefit To take specific measures as the evolving

circumstances warrant.

Mainly consist, Review of Macroeconomic and Monetary

Developments in the previous quarter. Stance of Monetary Policy for the remaining part of

year.

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First Quarter Review 2005-06

Key Developments

Increase in index ofIndustrial Production.

Continued good performance of corporate sector.

Good growth in manufacturing output. Improved level of business confidence.

Increase in credit of scheduled commercial banks .

Inflation remained on expected lines.

Oil prices in the international markets remained high.

Stance of Monetary Policy

No major change from the Annual Policy Statement.

Respond to evolving situations as per unfolding of risks.

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Mid Term Review of 2005-06

Monetary Developments

Oil prices in international markets remained high

I

ncrease in overall industrial growth Non-food credit growth high

Stance of Monetary Policy

Maintain appropriate liquidity to meet credit needs

Keep a watch on the evolving inflationary scenario Take prompt measures, to stabilize inflationary

expectations

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Recent developments

Liquidity crunch raising concerns about the economyscapacity to sustain the recent high-growth rates.

Banks demanding cut in the cash reserve ratio (CRR) to

infuse liquidity. RBI also exploring the possibility of releasing the excess

funds maintained under the statutory liquidity ratio(SLR).

OfLate, liquidity position appears to have improved with

the RBI resorting to the reverse repo window.

RBIs purchase of foreign exchange inflows for nearly twomonths has also led to injection of liquidity into thesystem.

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References

RBI Monetary Policy Statements

http://rbi.org.in

Indian Express (April 3, 2006)