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ASSIGNMENT
ON ANNUAL
MONETARY AND CREDIT
POLICY
OF
RBI -2010-2011
SUBMITTED TO-
SUBMITTED BY-
FACULTY OF BANKING
MANU CHANDNA
Mr.J.S.SHUKLA
PGDM B&F –I
MBF -0933
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Objectives-
1.The main aim of the monetary and credit
policy is to control the liquidity in order to
ensure better pricing of commodities.
2.We all know that India is a emerging market
where capital of inflow is very high ,the RBI
should adopt such a monetary policy which
should not affect the the capital inflow and
also the financial markets.
3.The central bank should ensure that it
should have a stable policy which should not
affect the growth of the economy because
continuous changes in the monetary and
fiscal policy can make the economy volatile.
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INTRODUCTION-
The Reserve Bank Of India will review the
monetary policy in April 2010.The RBI is also
going to have annual general meeting on 20th
April 2010.The RBI has to take some decisions
regarding inflation, without affecting the
growth.The RBI may also announce the norms
regarding the conversion of NBFC’s into
banks ,which was announce in the union
budget 2010.The review of this policy for RBI
might not be easy because RBI has to take
some decisions regarding controlling of
inflation,without affecting the inflow of FII’s
,FDI etc.The
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Inflation is increasing only due to scarcity of
food supply globally and increase in
international crude prices and not because of
liquidity in the market and factors like crude
oil and food supply can not be control by the
RBI.
What decisions can RBI take in this Policy?
The RBI has to take some decisions in order to
control inflation.The food inflation for the
week ended on 6th March 2010 stands at
16.3% which is very high and the overall
inflation stands at 9.56% for the month of
February 2010.We all know that the inflation
is increasing due to poor kharif crops which
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was due to drought which hit many districts
last year.The main concerned for the RBI is
that this inflation may soon spread to other
sectors also.Although RBI has already
increased the CRR by .75% to 5.75% which
has wiped out approximately Rs 27000 crore
from the market .I don’t think that RBI will
increase the interest rate in this policy
because in this budget govt. has announced
that India can achieve the growth in double
digit within few years.On the 75th anniversary
of RBI held in Mumbai in the month of
February 2010 the Governor of RBI
D.Subburao in his speech said that the price
stability is not the only concerned for the RBI
there are many other factors which RBI has to
look.The RBI can not do much to control
inflation which is increasing due to some
other factors like continuous increase in crude
prices ,increase in the prices of fertilizers
etc.The Govt. is already providing subsidies
on crude and fertilizers.According to the
estimation of OPEC, with the increasing
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demand of crude oil globally the crude oil may
touch more than 100 dollar per barrel at end
of the year which may result in increase in
inflation all over the world.I want to say that
RBI can not increase interest rate every time
to control inflation which is increasing due to
some other reasons.The RBI also planning to
make some changes in the wholesale price
index.The RBI may reduce the weightage of
cude oil prices which is highly volatile and
may increase the weightage of electronic
goods.The another reason that RBI may not
increase the interest rate is that according to
the data release by agriculture ministry on
Rabi crop is that the total output of Rabi crop
may stand at 282 million tones in 2010 vesus
280 miilion tone last year.There may be a
surplus of 18-19 miilion tones in rabi crop
against kharif crop which definitely going to
help in easing of food inflation.There is
another measure which RBI can adopt is that
by appreciating the rupee against dollar, they
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can import food commodities for some time,
this will not affect the balance of payment.
Why RBI Should Not Increase Interest Rate-
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According to me RBI should not increase
interest rate because Indian economy is
growing stably between 7-8% and not like
China which is getting overheated.We all
know that in china the inflation is increasing
and there has been the bubble which has got
created in the real estate due to stimulus
package given by the Chinese govt during
the recession of 4 trillion dollars.If this bubble
get bursted it may lead to bankruptcy of
many banks in china and foreign banks due to
high exposure in real estate and this may lead
the world globally into double dip recession.In
order to control this bubble the central bank
of china has already increased CRR three time
from the beginning of 2010 in order to
slowdown the economy little bit.With the
hardening of interest rate in china there is
high outflow of money by FII’s from china on
the fear of slowdown .I think If RBI does not
increase interest rate then they can attract
FII’s and FDI from China which can also help
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India to achieve double digit growth.According
to some world’s renounce economists
slowdown in china will act in the favour of
India and even Japan also because Japan and
China are both are export oriented economy
and competitors.Even the Chief Of IMF
Mr.Kahn also said that India is a stable
economy in comparison to China,although the
GDP of China is high than India.Acc to him
India can beat china within few year in terms
of economic power because India has more
better stabilizing agents like monetary and
fiscal measures.The other reason is that India
has the world’s largest pool of savings which
is around 32% and Indian economy is mainly
dependent on internal demand consumption
whereas China’s economy is mainly
dependent upon export if countries like U.S
and Europe get affected China’s economy
also get affected.There is another estimation
that if this save money (32%) comes into the
economy ,there is no need for Indian economy
to depend upon FII’s and FDI inflow,but for
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that Indian govt. has to take some initiative so
that this money can come into the system.
Although the main concern for India is the
fiscal deficit and the inflation.If govt. wants to
control inflation they should control the fiscal
deficit first because high fiscal deficit will
result in high inflation and it also reduces the
value of money.The measures taken by govt.
in order to control fiscal deficit through
disinvestment is a temporary one.If govt.
seriously want to control fiscal deficit then
they should abolish all the subsidies.It is
estimated that if govt. abolish all the
subsidies ,India’s GDP will touch 14% which
will be the highest in the world.The RBI should
not repeat that mistakes they did in 2008 at
the time of Mr.Y.Y Reddy who was the
governor of RBI at that time,in order to
control inflation he continuously increased
major rates which resulted In slowdown of
Indian economy.If sectors like real estate goes
in slowdown,it also affects other sectors also
like cement,steel etc.On other hand blunder
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was done by SEBI by banning the P-
notes(Participatory notes) which resulted in
huge outflow of cash by FII’s from capital
market.
Impacts if RBI increases interest rate-
If RBI increases interest rate then it can have
bad effects on the GDP numbers.The RBI
should not increase interest rate because
it has already increased CRR by .75% to
5.75% which has started hardening of interest
rate in the market.The Govt. is also planning
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to withdraw stimulus package slowly and
steadily and it can not be possible with
increased interest rate .If RBI increases
interest rate it can affect auto sector badly
which is booming right now and it can also
affect real estate sector which is struggling to
come out of the slowdown.The increase in
interest rate can also affect the the flow of
FII’s and FDI because there is always a fear
that increase in interest rate can slowdown
the economy which can badly affects the
sentiments in the stock exchange.
Concerns Regarding the slow credit growth-
The data released by the RBI on 13th January
2010 shows that banks credit growth rate
stands at 13.9% in 2009 whereas credit
growth rate in 2008 stands at 22%.According
to the statement given by the Governor
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On credit growth is that ,if the growth rate
slips below 12% it will be a concerned for the
economy and also for the banking
sector.According to me ,the main reason
behind the slow credit growth is that External
Commercial Borrowing popularly known as
ECB and the Private equity.During the period
of slowdown the govt. increased the limit for
ECB.The most of the private firms went for the
ECB because in countries like U.S and Europe
the interest rate is very low approximately
0.25%-0.75%.This was the main reason
behind the slow credit growth which may not
be the concern for the RBI.The agriculture was
the only sector where credit growth increased
from previous year because in agriculture ECB
is not allowed.At this point of time the credit
growth can be pick up by only imposing some
ceiling on the ECB ,but this will not be
possible for the RBI because India is a growing
economy where demand for credit remains
high because of continuous expansion and
diversification of industries and this is not
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possible for Indian banks to meet the demand
of credit for each and every sector.The other
reason behind the slow credit rate is the
LIBOR(London Inter Bank Offer Rate) ,in this
loans are provided for short term and now a
days the rate is at all time low.The another
reason for slow credit rate was also that
commercial banks were not ready to lend on
the fears that borrowers may not be able to
repay the loans and this may be converted
into NPA’s(Non Performing Assets) due to
slowdown or recession.In India the other
sector which was booming and known to be
parallel to commercial banks or scheduled
banks is NBFC(Non Banking Financial
Companies).During recession or slowdown
,this sector keep on giving loans to industries
and to retail borrower on easy terms and
conditions ,although it charges high rate of
interest than commercial banks.These NBFC
also do not need to meet the requirements of
CRR,Bank Rate etc.For eg-some of the
companies like Shriram Finance
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Companies,Reliance Capital etc has shown
high profitability even during the period of
slowdown.
Analysis of Tools which are use by RBI-
1) Bank Rate-The rate at which RBI lends
money to commercial banks or to any
scheduled bank is known as bank rate.The
current rate is 6%.If RBI increases this rate
it directly affects the prime lending rate.If
RBI increases this rate it will definitely
going to affect sectors like real estate,auto
sector etc .If RBI increases this rate this
will result in increase in deposit
rates,although it will not be easy for
commercial banks to increase deposit
rates because they already have ample
liquidity and slow credit growth.I don’t
think increasing the bank rate will going to
affect the private companies or corporate
because with the booming of Indian stock
exchange most of the companies are
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going for Private equity in order to raise
funds for eg-Private placement of
equity.But increase in Bank rate can affect
the general public because the general
public don’t have acess to ECB or Private
Equity.Whenever there is increase in the
bank rate there is a fear of slowdown in
the economy.
2) Cash Reserve Ratio(CRR)-In this every
commercial bank has to keep certain
amount of cash with the RBI.The current
rate is 5.75%.The main aim is to control
the liquidity available in the market.After
increasing CRR by .75% in the month of
January the RBI wipe out around RS
27000 crore from the market ,but still
there is ample liquidity of around Rs
60,000 crore available in the market which
decreases the fear that if CRR increases
again ,it will affect the economy.
3) SLR(Statutory Liquidity Ratio)-Every
commercial bank is required to keep some
reserves in the form of liquid assets like
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gold etc.The current rate is 25%.The
banks are already maintaining SLR of
27.5%.Due to high liquidity available with
the banks which was due to slow credit
growth , this make the banks to maintain
high SLR.Acc. to me increase in SLR will
not going to affect the banks because they
are already maintaining high SLR.
4) Repo rate-The rate at which RBI lends
money to commercial banks is known as
Repo rate.The current rate is 5%.The RBI
has already increase the repo rate by .
25% on 19-03-2010.The main aim of repo
rate is that it provide short term loans for
meeting the working capital rerquirements
of the banks.This loan is given for
overnight to few days whereas bank rate
deals with long term loans.I don’t think
that with the increase in this rate it will
going to affect anyone because banks are
having surplus liquidity with them and
there is another factor like LIBOR(London
Inter Bank Offer Rate) ,this deals with
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short tem loans and most of the
companies are going for this because due
to recession in U.K, the LIBOR is at all time
low.
5) Reverse Repo Rate-The rate at which
commercial banks park their surplus
money with the RBI is known as Reverse
Repo Rate.The current rate is 3.50%.The
RBI has recently increased this rate.I don’t
think that increase in this going to affect
anything because most of the banks has
park their funds in equity through mutual
funds because they are getting higher
returns.
Conclusion-
I don’t think that RBI will increase interest
rate only
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because of inflation which is mainly increasing
due to food supply factors and increase in
crude oil prices.If RBI increases interest rate
it will going to give bad signal about the
Indian economy and govt.policies .According
to me before increasing any interest rate in
order to control inflation govt should wait for
the rabi crop to come in the market which will
start coming in the month of April.I will also
recommend that govt. should implement
kirith parekh report on deregularisation of
crude prices with some modifications because
it is not easy for the govt to absorb huge
losses only because of subsidies.The govt
should deregularlise crude prices because it
will also help in reducing the govt. fiscal
deficit.The RBI should not tighten the
monetary policy as ,Federal Reserve Bank has
also kept the major rate unchanged last
night(16-03-2010).Although there is a
difference between the Indian economy and
the U.S economy ,but we all know that
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America is a economy which drives the whole
world.
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