PROJECT ON:

MONETARY POLICY OF RBI 2009-2010

SUBMITTED BY:
NISHIT SHETTY
ROLL NO: 53
TYBBI
 RBI Monetary Policy Statement 2009-10

Global Outlook

The global outlook has continued to deteriorate in the last quarter with projections for global
growth in 2009 undergoing rapid downward revision.  According to the IMF’s March 2009
forecast, global growth is projected to shrink by 0.5 to 1.0 per cent in 2009 in contrast to an
expansion of 3.2 per cent in 2008.  Other projections are even more dire. The World Bank
estimates global GDP to contract by 1.7 per cent and the OECD by as much as 2.7 per cent.  In
the US, economic activity has declined sharply, driven mainly by the decline in consumption and
exports.  The Euro area too is in a severe and synchronised contraction.

Emerging Market Economies

The IMF projects that the GDP growth of EMEs will decelerate to a range of 1.5-2.5 per cent in
2009, down from 6.1 per cent in 2008.  This downturn is clear evidence that the forces of
globalization are too strong for the decoupling hypothesis to work. The G-20 commitment to
desist from all forms of protectionism and to maintain open trade and investment regimes is a
source of comfort to EMEs in an otherwise discouraging external environment.

Domestic Outlook

Economic activity in India slowed down in Q1 and Q2 of 2008-09 as compared with over 9.0 per
cent growth in the previous three years. However, growth decelerated sharply in Q3 following
the failure of Lehman Brothers in mid-September 2008 and knock-on effects of the global
financial crisis on the Indian economy. Consequently, the growth rate during the first three
quarters (April-December) of 2008-09 slowed down significantly to 6.9 per cent from 9.0 per
cent in the corresponding period of the previous year (Table 1).
Table 1: Real GDP Growth (%)
Q1 Q2 Q3 April-December
Sector (April-June) (July-September) (October-December)
2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09
Agriculture 4.4 3.0 4.4 2.7 6.9 -2.2 5.5 0.6
Industry 8.5 5.2 7.5 4.7 7.6 0.8 7.9 3.5
Services 10.7 10.2 10.7 9.6 10.1 9.5 10.5 9.7
 Overall 9.1 7.9 9.1 7.6 8.9 5.3 9.0 6.9
Source: Central Statistical Organisation (CSO).
 

Agriculture

   The second advance estimates of the Ministry of Agriculture released in February 2009 have
placed total foodgrains production in 2008-09 at 227.9 million tonnes, lower than the production
of 230.8 million tonnes in the previous year. Subsequent information on good sowing for rabi
crops and the trend in procurement suggests that agricultural production during 2008-09 may
turn out to be better than earlier anticipated.

Industry

During 2008-09 so far (April-February), industrial growth based on the index of industrial
production (IIP), decelerated to 2.8 per cent, down by more than two-third from 8.8 per cent in
the corresponding period of the previous year. While IIP growth was 5.0 per cent in the first half
of 2008-09, the average growth in the following five months was insignificant (0.2 per cent).

Demand Components of GDP

Private consumption and investment demand decelerated during Q3 of 2008-09. Government

consumption demand, however, registered a sharp increase, reflecting the partial payout of the
Sixth Pay Commission Award and other fiscal stimulus measures. As a result, the share of
government consumption demand in GDP increased significantly.  Deceleration in net exports
growth in the successive quarters of 2008-09 had an adverse impact on the  overall GDP growth.

Corporate Performance

After registering robust growth during the five year period 2003-08, the performance of the
private non-financial corporate sector deteriorated in the first three quarters of 2008-09. Sales
growth of companies, which continued to be strong in Q1 and Q2, decelerated sharply in Q3 of
2008-09. Net profits, which recorded an average annual growth of over 40 per cent during 2003-
08, recorded a significantly lower growth in the first quarter of 2008-09.

Business Confidence

The Industrial Outlook Survey of the Reserve Bank for January-March 2009 indicates a further
worsening of perception for the Indian manufacturing sector. The overall business and financial
sentiment, which touched a seven-year low in the preceding quarter, slid below the neutral 100
mark, for the first time since the compilation of the index began in 2002..

Lead Indicators

In terms of lead indicators of the economy, economic activity in several services sectors has been
moderating. Cargo handled at major ports, passengers handled at airports, railway freight traffic
and arrival of foreign tourists registered lower/negative growth. Strong rural demand, lagged
impact of monetary and fiscal stimuli, softening of domestic input prices, investment demand
from brown-field projects and some restructuring initiatives are expected to have a positive
impact on industrial production in the months ahead.

Inflation

Headline inflation, as measured by year-on-year variations in the wholesale price index (WPI),
decelerated sharply from its intra-year peak of 12.91 per cent on August 2, 2008 to 0.26 per cent

by March 28, 2009. In terms of relative contribution to the fall in WPI inflation since August
2008, mineral oils and basic metals (combined weight 15.3 per cent in WPI) together accounted
for over 83 per cent of the decline reflecting global trend in commodity prices. The prices of
food articles, however, are still ruling high.

Monetary Conditions

Growth in key monetary aggregates – reserve money (RM) and money supply (M3) – in 2008-09
reflected the changing liquidity positions arising from domestic and global financial conditions
and the monetary policy response. Reserve money variations during 2008-09 largely reflected
the increase in the currency in circulation and reduction in the cash reserve ratio (CRR) of banks.

As indicated in the Third Quarter Review, reduction in the CRR has three inter-related effects on
reserve money. First, it reduces reserve money as bankers’ required cash deposits with the
Reserve Bank fall. Second, the money multiplier rises. Third, with the increase in the money
multiplier, M3 expands with a lag. While the initial expansionary effect is strong, the full effect
is felt in 4-6 months. Reflecting these changes, the year-on-year increase in reserve money in
2008-09 was much lower than in the previous year. 

Monetary management during 2008-09 was dominated by the response to the spillover effects of
global financial crisis and the need to address slackening of domestic demand conditions,
especially during the third quarter. As the Reserve Bank had to provide foreign exchange
liquidity to meet the demand from importers and contain volatility in the foreign exchange
market arising out of capital outflows by foreign institutional investors (FIIs), its net foreign
exchange assets (NFEA) declined. Thus, a notable feature of monetary operations during the
second half of 2008-09 was the substitution of foreign assets by domestic assets..

Credit Conditions

During 2008-09, the 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. At this rate, non-food credit
expansion was lower than that of 23.0 per cent in 2007-08 as also the indicative projection of
24.0 per cent set in the Third Quarter Review of January 2009. The intra-year changes in credit
flow could be attributed to several factors.  In the subsequent period, however, the demand for
credit moderated reflecting the slowdown of the economy in general and the industrial sector in
particular. Working capital requirements had also come down because of decline in commodity
prices and drawdown of inventories by the corporates. The demand for credit by oil marketing
companies also moderated. In addition, substantially lower credit expansion by private and
foreign banks also muted the overall flow of bank credit during the year (Table 11).

 
Table 11: Bank Group-wise Growth in Deposits and Credit
 (Per cent)
As on March 28,
Bank Group 2008 As on March 27, 2009
  (y-o-y) (y-o-y)
  Deposits
Public Sector Banks 22.9 24.1
Foreign Banks 29.1 7.8
Private Sector Banks 19.9 8.0
Scheduled Commercial  Banks* 22.4 19.8
  Credit
Public Sector Banks 22.5 20.4
Foreign Banks 28.5 4.0
Private Sector Banks 19.9 10.9
Scheduled Commercial Banks*  22.3 17.3
* Including RRBs.
 

Commercial banks’ investment in SLR securities, adjusted for LAF, declined marginally from
28.4 per cent of NDTL in March 2008 to 26.7 per cent in March 2009.

According to the data at a disaggregated level drawn from 49 banks accounting for 95.0 per cent
of total bank credit, the year-on-year growth in bank credit to industry as of February 2009 was
broadly similar to that in the previous year.  While credit flow to agriculture and real estate was
significantly higher, it was lower for housing. 

Total Flow of Resources to the Commercial Sector

The flow of resources from non-bank sources to the commercial sector throughout 2008-09 was
lower than that in the previous year, reflecting depressed domestic and international capital
market conditions. However, till mid-January 2009, higher bank credit growth compensated for
the decline in resources from non-banks.  Beginning from the fortnight ended January 16, 2009,
non-food bank credit growth turned lower than the previous year.  Reflecting moderation in both
bank credit and funds from other sources, the total flow of resources to the commercial sector
from banks and other sources during 2008-09 was significantly lower than that in the previous
year.
Interest Rates

Since mid-September 2008, the Reserve Bank has cut the repo rate by 400 basis points and the
reverse repo rate by 250 basis points. The CRR was also reduced by 400 basis points of NDTL
of banks Taking cues from the reduction in the Reserve Bank’s policy rates and easy liquidity
conditions, all public sector banks, most private sector banks and some foreign banks have
reduced their deposit and lending rates. The reduction in the range of term deposit rates between
October 2008 - April 18, 2009 has been 125-250 basis points by public sector banks, 75-200
basis points by private sector banks and 100-200 basis points by five major foreign banks. The
reduction in the range of BPLRs was 125-225 basis points by public sector banks, followed by
100-125 basis points by private sector banks and 100 basis points by five major foreign banks
(Table 16).  
Table 16: Reduction in Deposit and Lending Rates
(October 2008 - April 2009*)
(Basis points)
Lending Rates
Bank Group Deposit Rates (BPLR)
Public Sector Banks 125-250 125-225
Private Sector Banks 75-200 100-125
Five Major Foreign Banks 100-200 0-100
* As on April 18, 2009.

Financial Markets
Since October 2008, interest rates have declined across the term structure in the money and
government securities markets. The call/notice rates have remained near or below the lower
bound of the LAF corridor from November 2008. While the secondary market yield on the 10-
year government security touched an intra-year low of 5.11 per cent on December 30, 2008, it
then generally increased in the wake of the large market borrowing programme of the
Government, reaching 7.08 per cent on March 30, 2009..  
During the current fiscal year (up to April 17, 2009), the rupee has generally remained steady
(Chart 2).  
During 2008-09, equity markets weakened in tandem with global stock markets, reflecting
general deterioration in sentiment, FII outflows, slowdown in industrial growth and lower
corporate profits. The BSE Sensex declined to 8160 on March 9, 2009 from a peak of 20873
recorded on January 8, 2008; it closed higher at 11023 on April 17, 2009.

External Sector

India’s current account deficit (CAD) widened during 2008-09 (April-December) in comparison
with the corresponding period of the previous year. As net capital inflows declined sharply, the
overall balance of payments (BoP) position turned negative resulting in drawdown of reserves 

The overall approach to the management of India’s foreign exchange reserves takes into account
the changing composition of the balance of payments and endeavours to reflect the ‘liquidity
risks’ associated with different types of flows and other requirements. As capital inflows during
2007-08 were far in excess of the normal absorptive capacity of the economy, there was
substantial accretion to foreign exchange reserves by US$ 110.5 billion.

Stance of Monetary Policy

The policy responses in India since September 2008 have been designed largely to mitigate the
adverse impact of the global financial crisis on the Indian economy.  The conduct of monetary
policy had to contend with the high speed and magnitude of the external shock and its spill-over
effects through the real, financial and confidence channels.

The thrust of the various policy initiatives by the Reserve Bank has been on providing ample
rupee liquidity, ensuring comfortable dollar liquidity and maintaining a market environment
conducive for the continued flow of credit to productive sectors. The key policy initiatives taken
by the Reserve Bank since September 2008 are set out below:

Policy Rates

•      The policy repo rate under the liquidity adjustment facility (LAF) was reduced by 400 basis
points from 9.0 per cent to 5.0 per cent.
•      The policy reverse repo rate under the LAF was reduced by 250 basis points from 6.0 per
cent to 3.5
per cent.

Rupee Liquidity

•      The cash reserve ratio (CRR) was reduced by 400 basis points from 9.0 per cent of net
demand and time liabilities (NDTL) of banks to 5.0 per cent.
•      The statutory liquidity ratio (SLR) was reduced from 25.0 per cent of NDTL to 24.0 per
cent.
•      The export credit refinance limit for commercial banks was enhanced to 50.0 per cent from
15.0 per cent of outstanding export credit.
•      A special 14-day term repo facility was instituted for commercial banks up to 1.5 per cent of
NDTL.
•      A special  refinance facility was instituted for scheduled commercial banks (excluding
RRBs) up to 1.0 per cent of each bank’s NDTL as on October 24, 2008.

Forex Liquidity

•      The Reserve Bank sold foreign exchange (US dollars) and made available a forex swap
facility to banks.
•      The interest rate ceilings on non-resident Indian (NRI) deposits were raised.  
•      The all-in-cost ceiling for the external commercial borrowings (ECBs) was raised. The all-
in-cost ceiling for ECBs through the approval route has been dispensed with up to June 30, 2009.

Regulatory Forbearance

•      The risk-weights and provisioning requirements were relaxed and restructuring of stressed
assets was initiated. 

A detailed listing of various policy measures undertaken by the Reserve Bank since September
2008 is set out in Annex I.  

Liquidity Impact

The actions of the Reserve Bank since mid-September 2008 have resulted in augmentation of
actual/potential liquidity of over Rs.4,22,000 crore. In addition, the permanent reduction in the
SLR by 1.0 per cent of NDTL has made available liquid funds of the order of Rs.40,000 crore for
the purpose of credit expansion.

Growth Projection

The India Meteorological Department in its forecast of South-West monsoon expects a normal
rainfall at 96 per cent of its long period average for the current year. The fiscal and monetary
stimulus measures initiated during 2008-09 coupled with lower commodity prices could cushion
the downturn in the growth momentum during 2009-10 by stabilising domestic economic activity
to some extent. Private investment demand is, therefore, expected to remain subdued.

Inflation Projection

On account of slump in global demand, pressures on global commodity prices have abated
markedly around the world. The sharp decline in prices of crude oil, metals, foodgrains, cotton
and cement has influenced inflation expectations in most parts of the world. This is also reflected
in the domestic WPI inflation reaching close to zero. Prices of manufactured products have
decelerated sharply, while that of the fuel group have contracted, though inflation on account of
food articles still remains high. The WPI inflation, however, is expected to be in the negative
territory in the early part of 2009-10.

Monetary Projection

Monetary and credit aggregates have witnessed deceleration since their peak levels in October
2008. The liquidity overhang emanating from the earlier surge in capital inflows has
substantially moderated in 2008-09. The Reserve Bank is committed to providing ample liquidity
for all productive activities on a continuous basis. As the upside risks to inflation have declined,
monetary policy has been responding to slackening economic growth in the context of significant
global stress. Accordingly, for policy purposes, money supply (M3) growth for 2009-10 is placed
at 17.0 per cent. Consistent with this, aggregate deposits of scheduled commercial banks are
projected to grow by 18.0 per cent.

Overall Assessment

The global financial and economic outlook continues to be unsettled and uncertain. The latest
assessment by major international agencies projecting sharp contraction in global trade volumes
in 2009 has exacerbated the uncertainty. The current assessments project little chance of global
economic recovery in 2009.

Governments and central banks all over the world have responded to the ongoing global financial
crisis by initiating several large, aggressive and unconventional measures.

The Reserve Bank was able to manage the large borrowing programme of the Central and State
Governments in 2008-09 in an orderly manner.  The market borrowings of the Central and State
Governments are expected to be higher in 2009-10. Thus, a major challenge is to manage the
large government borrowing programme in 2009-10 in a non-disruptive manner. Large
borrowings also militate against the low interest rate environment that the Reserve Bank is trying
to maintain to spur investment demand in keeping with the stance of monetary policy. of 3.0
percentage points. This should leave adequate resources with banks to expand credit.

Policy Stance

On the basis of the above overall assessment, the stance of monetary policy in 2009-10 will
broadly be as follows:

•      Ensure a policy regime that will enable credit expansion at viable rates while preserving
credit quality so as to support the return of the economy to a high growth path.

•      Continuously monitor the global and domestic conditions and respond swiftly and
effectively through policy adjustments as warranted so as to minimise the impact of adverse
developments and reinforce the impact of positive developments.
 Monetary Measures
Bank Rate

The Bank Rate has been retained unchanged at 6.0 per cent.

Repo Rate

It is proposed:
•      to reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points
from 5.0 per cent to 4.75 per cent with immediate effect.   

Reverse Repo Rate

It is proposed:
•      to reduce the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.25
per cent with immediate effect.

The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at
variable rates as circumstances warrant.The Reserve Bank retains the option to conduct
overnight or longer term repo/reverse repo under the LAF depending on market conditions and
other relevant factors. The Reserve Bank will continue to use this flexibly including the right to
accept or reject tender(s) under the LAF.

Cash Reserve Ratio

The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 5.0 per cent of
net demand and time liabilities (NDTL).
 Bank of Canada- Banque Du Canada

What is the Bank's approach to monetary policy?

The cornerstone of the Bank's monetary policy framework is its inflation-control system, the
goal of which is to keep inflationInflation is a persistent rise overtime in the average price of
goods and services. near 2 per cent — the mid-point of a 1 to 3 per cent target range. This system
provides a clear measure of the effectiveness of monetary policy, and increases the predictability
of inflation.

The Bank is equally concerned with significant movements in the inflation rate, both above the 2
per cent mid-point and below it. When demandThe level of demand for Canadian goods and
services. is strong, it can push the economy against the limits of its capacity to produce. This
tends to raise inflation above the midpoint, so the Bank will raise interest rates to cool off the
economy.
How is monetary policy carried out?

The Bank carries out monetary policy by influencing short-term interest rates. It does this by
raising and lowering the target for the overnight rate. (The "overnight rate" is the interest rate at
which major financial institutions, Banks, credit unions and similar credit-granting organizations.
borrow and lend one-day (or overnight) funds among themselves.) In November 2000, the Bank
introduced a system of eight "fixed" dates each year on which it announces whether or not it will
change the target for the overnight rate.

Changes in the target for the overnight rate usually lead to changes in other interest rates, and so
affect people's spending decisions. This, in turn, influences the level of demand for goods and
services. When demand exceeds supply, prices will rise.

 
 

What are its benefits?

Low, stable and predictable inflation is the best contribution that monetary policy can make to a
productive, well-functioning economy. It allows Canadians to make spending and investment
decisions with more confidence. This encourages longer-term investment in Canada's economy,
and contributes to sustained job creation and greater productivity. This in turn leads to real
improvements in our standard of living.
As the nation's central bank, the Bank of Canada has five main areas of functions:

Monopoly of Issue of Currency Notes

The Bank of Canada designs and issues bank notes that Canadians can use with the highest
confidence. The Bank of Canada is the country's sole bank note-issuing authority and is
responsible for designing, producing, and distributing Canada's bank notes.

Regional Offices

The Bank of Canada's regional offices are located in Vancouver, Calgary, Toronto, Montréal and
Halifax. As part of their mandate, the regional offices serve as contact points for Canadians
requiring assistance to access services offered by the Bank. Among the range of services offered
is the delivery of currency education programs to law enforcement, financial institutions and
retailers

Design and Production

It can take several years to design a series of bank notes, and once the design has been approved,
the Bank contracts the printing of the bank notes to two security printing companies: Canadian
Bank Note Company, Limited and BA International Inc. The bank notes are printed 45 to a
sheet, cut, and delivered to the Bank.

Distribution

The Bank of Canada must be prepared to supply financial institutions with enough bank notes to
satisfy public demand. Financial institutions get bank notes through the country's Bank Note
Distribution System and return notes that are considered unfit for further circulation to the Bank
of Canada. These notes are verified on high-speed, note-processing equipment and then
shredded. The resulting shred is disposed of in landfill sites.

Financial System

The Bank of Canada actively promotes safe, sound, and efficient financial systems, both
within Canada and internationally, and conducts transactions in financial markets in support
of these objectives. Financial Institutions

These include banks, credit unions, and similar organizations. The Bank of Canada routinely
provides "liquidity" to financial institutions that are participants in the financial system; that is, it
lends them money overnight to facilitate the settlement of payments systems . As the "lender of
last resort," the Bank also provides emergency liquidity to eligible institutions that face
significant funding problems.
Financial Markets

These consist of markets for money, bonds, equities, derivatives, and foreign exchange. The
Bank is closely involved with Canada's financial markets through its activities in the foreign
exchange market, its marketing and management of government securities, and its influence on
interest rates via the target for the overnight rate.

Payments and Other Clearing and Settlement Systems

These are the systems through which funds flow from one account and financial institution to
another; for instance, when a customer of one bank writes a cheque to a customer of another
bank.

Foreign Exchange Reserves

The Bank also manages the government's foreign exchange reserves. These reserves provide
general liquidity for the government and help promote orderly conditions in the Canadian-dollar
foreign exchange market. On very rare occasions the Bank may directly intervene in the market,
to counter disruptive short-term movements in the Canadian dollar.

Banker to the government and Treasury Manager

The Bank manages the accounts of the Receiver General, through which almost all money
collected and spent by the government flows. The Bank ensures that these accounts have enough
cash to meet daily requirements and invests any surpluses in term deposits.

Funds Management

The Bank of Canada provides high-quality, effective, and efficient funds-management and
central banking services for the federal government, the Bank, and other clients.

Corporate Administration

Corporate Administration supports the sound management of human, financial, information,

technology and physical resources and related infrastructure through the development of
corporate policies and the maintenance of cost-effective, integrated systems and practices.
 STATE BANK OF PAKISTAN

MONETARY POLICY DECISION

The economy’s ability to achieve sustainable recovery remains constrained owing to slow
progress in the prevailing security and economic conditions. The key economic variables
impeding stabilization and thereby growth are high and persistent inflation, continuing fiscal
slippages and unresolved power sector issues. Whereas adjustments in administered prices of
fuel and energy and the post-flood disruption in the supply chain of food items have contributed
to the recent upsurge in inflation, the high level of government borrowing from the SBP is
diluting the effectiveness of monetary policy in containing excessive monetary expansion and
thus inflation.
High inflation, at a fundamental level, persists because of money creation in excess of
productive activity in the economy. Of the Rs308 billion expansion in reserve money up till 19th
November 2010 during the current fiscal year, Rs266 billion is due to government borrowing
from the SBP, which has been on an increasing trend since January 2010. Such borrowing has
stoked expectations of increasing inflation, resulting in high interest rates.
The nature of this fiscal expansion is the fundamental source of high inflation in Pakistan
over the last year.Increases in electricity and domestic petroleum prices and the impact of the
catastrophic floods on food prices did play their part in providing impetus to CPI inflation but do
not fully explain the persistence in inflation.
On the other hand, the persistent component of inflation, proxied by core trimmed
inflation, remains sticky at over 12.5 percent on year-on-year basis since January 2010 and has
increased to a 1 percent monthly change in October 2010, with expectations of further increases.
An important source of this stickiness is the expectations of a persistent reliance of the
government on SBP to finance its deficit. Indeed, the co-movement between persistence of
inflation and that of government’s financing gap is no coincidence. Therefore, it would be
difficult to bring inflation down unless government borrowing from SBP is curtailed
substantially and kept under control on a sustained basis.
Government borrowing from SBP at an increasing rate reflects severe fiscal
vulnerabilities. Given the delays in the introduction of tax reforms and weak industrial
production, the task of achieving close to 27 percent enhancement in tax revenues during FY11
is beginning to look quite ambitious.
 Statutory Obligations (RMD)
STATUTORY CASH RESERVE

In terms of Section36(1) SBP Act, 1956, every scheduled bank is required to maintain with State
Bank a balance the amount of which shall not at the close of business or any day be less than
such percentage of Time & Demand Liabilities in Pakistan as may be determined by State
Bank.Presently the requirement is 5% on weekly average basis subject to daily minimum of 4%
of Time & Demand Liabilities (reference BPRD Circular No.27 dated 2nd July,1999).

STATUTORY LIQUIDITY REQUIREMENT

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every banking company shall
maintain in Pakistan in cash, gold or un-encumbered approved securities valued at price not
exceeding "the lower of cost or the current market price" an amount which shall not at the close
of business in any day be less than such percentage of the total of its time & demand liabilities in
Pakistan, as may be notified by State Bank from time to time.

Presently the requirement is 15% (excluding 5% statutory cash reserve) of the total of its time
and demand liabilities in Pakistan (BPRD Circular No.26 dated 2nd July, 1999).

MAINTENANCE OF LIQUIDITY AGANINST CERTAIN LIABILITIES

In terms of Rule 6 of NBFIs Rules of Business, all NBFIs are required to invest 14% of their
liabilities defined in the Rule, in Government Securities, NIT Units, shares of listed companies
or listed debt securities in the prescribed manner. For the purpose of this rule, liabilities shall not
include NBFIs equity, borrowings from financial institutions including accruals thereon, lease
key money, deferred taxation not payable within 12 months, dividend payable within two
months, advance lease rentals and deposits from financial institutions. In addition, they are also
required to maintain cash balance with State Bank, which shall not be less than 1% of their
liabilities as defined above.

SUBMISSION OF ANNUAL AUDITED ACCOUNTS BY NBFIs

Under Rule 17 of NBFIs Rule of Business, all NBFIs are required to invest to submit their
annual audited accounts within a period of 6 months after the close of their accounting year.

ANNUAL ACCOUNTS

At the expiration of each calendar year every banking company incorporated in Pakistan, in
respect of all business transacted by it, and every banking company incorporated outside
Pakistan, in respect of all business transited through its branches in Pakistan, shall prepare with
reference to that year a balance-sheet and profit and loss account as on the last woking day of the
year in the prescribed forms(Section 34 of Banking Companies Ordinance, 1962).
SUBMISSION OF RETURNS.

The accounts and balance-sheet referred to in section 34 together with the auditor’s report as
passed in the annual General Meeting shall be published in the prescribed manner, and three
copies thereof shall be furnished as returns to the State Bank within three months of the close of
the period to which they relate (Section 36 of Banking Companies Ordinance, 1962).

MINIMUM CAPITAL REQUIREMENTS

In terms of Section 13 of Banking Companies Ordinance, 1962 no banking company shall

commence business unless it has a minimum paid up capital as may be determined by the State
Bank or carry on business unless the aggregate of its capital and unencumbered general reserves
is of such minimum value within such period as may be determined and notified by the State
Bank from time to time for banking companies in general or for a banking company in particular.

As present, all banks operating in Pakistan are required to maintain capital and unhecumbered
general reserve, the value of which is not less than 8% of their risk weighted assets. Additionally
they are also required to maintain a minimum paid up capital of Rs.500 million.

Core Functions of State Bank of Pakistan

State Bank of Pakistan is the Central Bank of the country. While its constitution, as originally
laid down in the State Bank of Pakistan Order 1948, remained basically unchanged until 1st
January 1974 when the Bank was nationalised, the scope of its functions was considerably
enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of
its operations today.

Under the State Bank of Pakistan Order 1948, the Bank was charged with the duty to "regulate
the issue of Bank notes and keeping of reserves with a view to securing monetary stability in
Pakistan and generally to operate the currency and credit system of the country to its advantage".
The scope of the Bank’s operations was considerably widened in the State Bank of Pakistan Act
1956, which required the Bank to "regulate the monetary and credit system of Pakistan and to
foster its growth in the best national interest with a view to securing monetary stability and fuller
utilisation of the country’s productive resources". Under financial sector reforms, the State Bank
of Pakistan was granted autonomy in February 1994. On 21st January, 1997, this autonomy was
further strengthened by issuing three Amendment Ordinances (which were approved by the
Parliament in May, 1997) namely, State Bank of Pakistan Act, 1956, Banking Companies
Ordinance, 1962 and Banks Nationalisation Act, 1974.

Like a Central Bank in any developing country, State Bank of Pakistan performs both the
traditional and developmental functions to achieve macro-economic goals. The traditional
functions, which are generally performed by central banks almost all over the world, may be
classified into two groups: (a) the primary functions including issue of notes, regulation and
supervision of the financial system, bankers’ bank, lender of the last resort, banker to
Government, and conduct of monetary policy, and (b) the secondary functions including the
agency functions like management of public debt, management of foreign exchange, etc., and
other functions like advising the government on policy matters and maintaining close
relationships with international financial institutions.

 REGULATION OF LIQUIDITY

Being the Central Bank of the country, State Bank of Pakistan has been entrusted with the
responsibility to formulate and conduct monetary and credit policy in a manner consistent with
the Government’s targets for growth and inflation and the recommendations of the Monetary and
Fiscal Policies Co-ordination Board with respect to macro-economic policy objectives. The basic
objective underlying its functions is two-fold i.e. the maintenance of monetary stability, thereby
leading towards the stability in the domestic prices, as well as the promotion of economic
growth.

To regulate the volume and the direction of flow of credit to different uses and sectors, the Bank
makes use of both direct and indirect instruments of monetary management. Until recently, the
monetary and credit scenario was characterised by acute segmentation of credit markets with all
the attendant distortions. Pakistan embarked upon a program of financial sector reforms in the
late 1980s. A number of fundamental changes have since been made in the conduct of monetary
management which essentially marked a departure from administrative controls and quantitative
restrictions to market-based monetary management. A reserve money management programme
has been developed. In terms of the programme, the intermediate target of M2 would be
achieved by observing the desired path of reserve money - the operating target.

     ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM:REGULATION AND

SUPERVISION

One of the fundamental responsibilities of the State Bank is regulation and supervision of the
financial system to ensure its soundness and stability as well as to protect the interests of
depositors. The rapid advancement in information technology, together with growing
complexities of modern banking operations, has made the supervisory role more difficult and
challenging. The institutional complexity is increasing, technical sophistication is improving and
technical base of banking activities is expanding. All this requires the State Bank for
endeavoring hard to keep pace with the fast-changing financial landscape of the country.
Accordingly, the out dated inspection techniques have been replaced with the new ones to have
better inspection and supervision of the financial institutions. The banking activities are now
being monitored through a system of ‘off-site’ surveillance and ‘on-site’ inspection and
supervision. Off-site surveillance is conducted by the State Bank through regular checking of
various returns regularly received from the different banks. On other hand, on-site inspection is
undertaken by the State Bank in the premises of the concerned banks when required.

    
EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS

One of the major responsibilities of the State Bank is the maintenance of external value of the
currency. In this regard, the Bank is required, among other measures taken by it, to regulate
foreign exchange reserves of the country in line with the stipulations of the Foreign Exchange
Act 1947. As an agent to the Government, the Bank has been authorised to purchase and sale
gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the
International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank
of Pakistan Act, 1956.

The Bank is responsible to keep the exchange rate of the rupee at an appropriate level and
prevent it from wide fluctuations in order to maintain competitiveness of our exports and
maintain stability in the foreign exchange market. To achieve the objective, various exchange
policies have been adopted from time to time keeping in view the prevailing circumstances. Pak-
rupee remained linked to Pound Sterling till September, 1971 and subsequently to U.S. Dollar.

DEVELOPMENTAL ROLE OF STATE BANK

The responsibility of a Central Bank in a developing country goes well beyond the regulatory
duties of managing the monetary policy in order to achieve the macro-economic goals. This role
covers not only the development of important components of monetary and capital markets but
also to assist the process of economic growth and promote the fuller utilisation of a country’s
resources.

Ever since its establishment, the State Bank of Pakistan, besides discharging its traditional
functions of regulating money and credit, has played an active developmental role to promote the
realisation of macro-economic goals. The explicit recognition of the promotional role of the
Central Bank evidently stems from a desire to re-orientate all policies towards the goal of rapid
economic growth. Accordingly, the orthodox central banking functions have been combined by
the State Bank with a well-recognised developmental role.

The scope of Bank’s operations has been widened considerably by including the economic
growth objective in its statute under the State Bank of Pakistan Act 1956. The Bank’s
participation in the development process has been in the form of rehabilitation of banking system
in Pakistan, development of new financial institutions and debt instruments in order to promote
financial intermediation, establishment of Development Financial Institutions (DFIs), directing
the use of credit according to selected development proirities.
 Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) is the central bank of Singapore and carries
out a full range of central banking functions, including the issuance of currency following its
merger with the Board of Commissioner of Currency, Singapore (BCCS) on 1 October 2002.
Like any central bank, one core function of MAS is the conduct and implementation of monetary
policy. This function is undertaken by the Monetary Management Division (MMD) of MAS,
whose four primary responsibilities are:
i. Implementation of exchange rate policy;
ii. Conduct of money market operations for banking system liquidity management;
iii. Management / issuance of Singapore Government Securities (SGS) in support of government
initiatives in bond market development; and
iv. Provision of banking and financial services to the government.

In recent years, various aspects of monetary policy operations have been of much public
and policy interest, particularly the modus operandi of MAS' foreign exchange and money
market operations. This monograph looks behind the MAS' veil and aims to illuminate some key
aspects of its monetary policy operations. More specifically, the monograph assesses the
monetary implications of MAS' operations and elucidates the effects of these operations on
MAS' balance sheet.

The monograph is organised as follows. Section 2 first sets out a stylised central bank
balance sheet, with numbers from a typical MAS balance sheet for illustration. It also provides
an overview of MAS' interactions with the other key players in the banking system, viz. the
government represented by the Accountant-General's Department (AGD), the Central Provident
Fund (CPF) Board, and banks in Singapore. Section 3 outlines the objective of each of MAS' key
responsibilities in monetary policy operations and provides details on how these operations affect
the key components of MAS' balance sheet.

Monopoly of Power to Issue Notes:

The Currency Department of the MAS is responsible for the issuance of S$ currency notes.
MAS maintains a stock of S$ currency notes as a buffer to meet seasonal demand for currency
by the public. When a bank needs S$ currency notes to meet increased demand by customers
(e.g., during Chinese New Year and other festive periods), it goes through a process known as
“encashment” of the S$ claims in its account with MAS. For example, when Bank A wants to
encash its S$ claims on MAS, MAS will debit the bank's current account with it and, in return,
pay Bank A an equivalent amount of S$ currency notes out of its currency holding. Although the
amount of the bank’s cash balance with MAS is reduced as a result, there is a corresponding
increase
in currency in active circulation, leading to no change in the overall monetary base.
In the opposite case in which a bank wants to reduce its holding of excess S$ currency notes, it
will surrender these notes to MAS, which will in turn credit the bank's current account with MAS
for the same amount. Every morning, the gross amounts of currency to be issued and returned
that day, and hence its net effect on banks' MCB, are taken into account as an autonomous
money market factor in MAS’ money market operations.

Central Provident Fund Board:

The CPF scheme is Singapore's mandatory and defined contribution pension fund scheme. The
CPF Board administers the CPF scheme and collects CPF contributions from members and
employers, and dispenses funds to members under the various approved CPF withdrawal
schemes. Given the relatively youthful profile of CPF members at present, CPF contributions
have tended to exceed CPF withdrawals. The CPF Board places the net proceeds as Advance
Deposits with MAS for subsequent subscription to Special Issues of Singapore Government
Securities. These Special Issues of SGS have original maturities of 20 years and are non-
marketable. They are issued specifically to the CPF Board to meet its investment requirements
under the CPF Act and pay an interest equivalent to the interest the CPF Board pays to CPF
members.

Custodian of Foriegn Exchange Reserves :

The foreign assets of MAS constitute Singapore's Official Foreign Reserves (OFR). The size of
OFR is an important indicator of a country's financial standing and provides the central bank the
capacity to intervene in the FX market in support of the domestic currency. This is particularly
important for Singapore given that its monetary policy is centred on the management of the
trade-weighted basket of the exchange rates of Singapore's major export competitors and sources
of imports. Indeed, the size of Singapore's OFR has over the years provided significant
confidence in, and underpinning to, the Singapore economy in general and strength of the
Singapore Dollar (S$)
in particular.

Controller of Credit:
In conducting money market operations for liquidity management in the banking system, MAS
may lend to or borrow from banks in Singapore, both on a secured and unsecured basis. This will
appear as an asset (domestic credit) or liability depending on whether lending exceeds borrowing
or not. Table 1 shows that there was a net borrowing from banks of S$1.0 billion, comprising an
outstanding borrowing of S$1.2 billion and an outstanding lending of S$0.2 billion. At the same
time, MAS also holds an inventory of Singapore Government Securities (SGS) for use in its
money market operations and for the MAS Repo Facility to facilitate market-making by Primary
Dealers in the SGS market. MAS' acquisition of SGS, mostly at primary auctions, is classified as
domestic credit extended to the government, as SGS are the debt liabilities of the government.
Banker to the Government:
Central banking has its roots in the provision of banking services to the government and, to-date,
most central banks, including MAS, continue to undertake this function to varying extent. In
view of the significant role of the government in the economy, the transactions which it
undertakes would have a sizeable influence on the flows of funds in the banking system. Given
the fiscal rectitude of the government and its consistent budget surpluses over the years, there has
been a net transfer of funds by the government from the banking system to MAS. As such,
government deposits with MAS have always been positive and growing over the years. Adding
to this pool of deposits are the net proceeds of SGS issuance, and surplus funds from the CPF as
contributions of CPF members exceed withdrawals at present.

Regulator of Domestic Financial Institutions:

Being the central bank, MAS is at the heart of the domestic banking system and interacts with
the key participants as outlined above. As monetary policy in Singapore is centred on the
management of the trade-weighted exchange rate, MAS conducts money market operations to
ensure sufficient liquidity in the banking system to meet banks' demand for reserve and
settlement balances..

In summary, this monograph has provided an overview of MAS' key functions in the area of
monetary policy operations, and the related markets and key participants. As discussed, the
various aspects of monetary policy operations involved are fairly intricate and closely
interlinked, with important systemic implications for the banking system and the economy.
These functions are also carried out with the broader macroeconomic objectives in mind,
including sustained medium-term noninflationary economic growth, financial and monetary
stability, and development of financial services sector.