2011-12 Monetary Policy Analysis

7/31/2019 2011-12 Monetary Policy Analysis

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By

Abhey Bansal (01) Amarjeet

(106)

Anchal Khare(03) Anuragdeep

Badyal(12)

Chetan Gandhi (16) K.K. Srinivas

(118)Naman Daga (32) V. Sathwik Mohan


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Working group report on Operating procedures of

Monetary policy put out in March

Changes in Operating procedures are as follows: Policy repo rate to be the only independent rate

Reverse repo to be dependent on repo rate

Instituting MSF, MSF rate again dependent on repo rate

All recommendations came to force on 3rd May

2011, except MSF which came to effect from 7th

May 2011.

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Date onwhich

change wasproposed

Rate/facilitychanged

Magnitude of change(in basis points)

Previousvalue (in

%)

Currentvalue (in

%)

May 3rd 2011 Policy repo

rate

50 6.75 7.25

May 3rd 2011 Reverse repo

rate

50 5.75 6.25

May 7th 2011 Marginal

Standing

Facility (MSF)

-- -- 8.25

May 3rd 2011 Bank rate -- (unchanged) 6.00 6.00

May 3rd 2011 CRR -- (unchanged) 6.00 6.00

May 3rd 2011 SLR -- (unchanged) 24.00 24.00

June 16th

2011

Policy repo

rate

25 7.25 7.50

June 16th

2011

Reverse repo

rate

25 6.25 6.50

June 16th2011

MSF 25 8.25

8.50


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Date onwhichchange wasproposed

Rate/facilitychanged

Magnitude of change(in basis points)

Previousvalue (in%)

Currentvalue (in%)

July 26th 2011 MSF 50 8.50 9.00

Sept 16th

2011

Policy repo

rate

25 8.00 8.25

Sept 16th2011

Reverse reporate

25 7.00 7.25

Sept 16th

2011

Marginal

Standing

Facility (MSF)

25 9.00 9.25

Oct 25th 2011 Policy repo

rate

25 8.25 8.50

Oct 25th 2011 Reverse repo

rate

25 7.25 7.50

Oct 25th 2011 MSF 25 9.25 9.50

Jan 28th 2012 CRR -50 6.00 5.50

Feb 14th 2012 Bank rate 350 6.00

9.50


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The macro economic rationale behind RBIs policy moves

are:

Sluggishness in international markets and economy

Sovereign debt of the euro zone and uncertainty ofrecovery in the near future

Worsening global economic outlook

High levels of inflation in food, non-food products and oil

prices which were likely to persist longer - WPI inflationrose from 9.2 per cent in July to 9.8 per cent in August

2011

Premature change may dilute impact of past policy

changes, hence it was imperative to persist with the anti

inflationary stance5


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The central governments fiscal imbalances widened

during April-July of 2011

Fiscal deficit at 55.4 per cent of the budget estimates in

the first four months of the current fiscal was significantly

higher than that of 42.5 per cent during the

corresponding period last year

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Tight liquidity - daily average borrowings under theliquidity adjustment facility (LAF) were around Rs. 40,000crore in September (up to September 15, 2011)

Monetary growth kept pace even as money market

liquidity tightened Year-on-year money supply (M3) growth at 16.7 per cent

in August was higher than the projection of 15.5 per centfor the year reflecting higher growth in term deposits andmoderation in currency growth

Mitigating liquidity by reduction in CRR and injectingprimary liquidity of about Rs. 800 billion

Financial Markets - Pressure from global spillovers

Price Situation - Inflation initially persisted but had

trended down, while upside risks remained significant 7


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15Total 2,60,000


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Capital Flows 2011-12

(US$ bn)

Apr-Aug Sep-Dec Jan-Feb

FDI in India 4.8 3 3.1FDI by India 1 0.8 0.8

FIIs (net) 0.4 0.1 4.7

ADRs/GDRs 0.1 0.1 0

ECB Infows 1.3 0.6 1

NRI Deposits (net) 0.5 1.2 1.2

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US$ bn2011-12

Q1 Q2 Q3 Q41. Goods Exports 77.4 74.4 76.5 71.22. Goods Imports 107.4 115.6 119.8 118.8

3. Trade Balance(1-2) -30 -41.3 -43.4 -47.74. Services Exports 35.3 33 32.4 36.75. Services Imports 20.7 17.9 18.4 21.76. Net Services (4-5) 14.6 15.1 14 15

7. Current Account Balance -6.3 -15.7 -18.4 -19.6


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(as a percentage of GDP)

2011-12

Q1 Q2 Q3 Q4

Trade Balance -6.3 -9.1 -9.8 -10.5

Net Services 3 3.3 3.1 3.3Net Income 1.9 2.3 2.5 2.9

Current AccountBalance -1.3 -3.5 -4.1 -4.3

Slowdown in exports due to global uncertainty and Euro

crisis.


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Index of Industrial Production (IIP) in simplest terms isan index which details out the growth of various sectors

in an economy.

Indian IIP focuses and is made up of sectors like mining,

electricity and manufacturing.

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1. Fragile economic recovery in US.

2. Moderately subdued expectations at home affected the

growth in industrial sector.

3. There was a contraction in production in the mining

sector, particularly the coal and natural gas segments.

Also contraction in output led to a negative contributiontowards IIP.

4. Growth moderated in the manufacturing sector, from 9.0

per cent in April-December 2010 to 3.9 per cent: given its

large share in the IIP, it led to a slowdown in the industrysector as a whole.

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25

Yield of 10 yr G-sec


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Range bound yield in period from Jul1 to Sep28, 2011

- Unprecedented increase in repo rate on july 26, 11th time byincrease in 50bps.

- inflationary expectations over the longer-term horizon remain

anchored

Spike in yield after Sep

- Repo rate hiked twice by 25bps to 8.5%

- announced increase in the Governments market borrowingsby Rs 52,872 crore over and above the amount budgeted for2011-12

- about 40% of the Rs 10,000 crore put up for auction, were leftwith the primary dealers, called devolvement in market

parlance. 26


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Dip in yield after Dec

- RBI slashed CRR from 6% to 4.75% after dec

- this would infuse Rs 48,000 crore into the banking

system

- government sets the fiscal deficit target at around 4.6/

4.8% on account of 3G spectrum auction (Rs 1.08lakh

crore)

Increase in yield after April17

- RBI slashed repo rate from 8.5% to 8%

- India's economy grew by 6.1 percent in the December

quarter 27


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Effective lending rates, is projected to increase from 9.7 per cent

in 2010-11 to 10.3 per cent in 2011-12.

RBI has proposed higher and stringent provisioning norms for

banks

Increase in savings rate and higher stringent provisioning

norms would negatively impact the profitability of the banking

sector.

Category of Advances Existing % New %

Secured Sub standard 10 15

Unsecured Sub Standard 20 25

Secured up to 1 year 20 25

Secured >1 and


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Based on recommendations of the High Level Task Force on MSMEs The credit flowto the MSEs may increase

Banks are mandated to achievea 10 per cent annual growth in

the

number of micro enterpriseaccounts and a 20 per cent

year-on-year growth in

credit to the MSE sector

Banks may pass this increased cost of funds to the MSMEs, increasing lending rates

Increased cost of borrowing for the MSMEs could result in reduced profitability.

Increase in short term lending rates may also result in costlier finance for home

loans and auto loans segment.

Savings rate increased by 50 basis points from 3.5% to 4%

The net income margins (NIM) of all the banks are set to decrease.


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Malegam Committee : The loan must be given to the borrower with a ruralhousehold annual income not exceeding ` 60,000 or urban and semi-urbanhousehold income not exceeding ` 1,20,000

After being criticized for levying high interest rate from small borrowers by

MFIs, RBI has set the interest rate cap of 26 percent i.e. 2 percent morethan the

rate recommended by the committee and to bring the transparency ininterest

charges.

Moreover, RBI has increased mobile-based transaction facility up from `1,000

to ` 5,000 without end-to-end encryption; this may aid small valuetransactions.


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Raised Key lending rates 13 times(375 Basis Points)

since March, 2010

Then reduction in CRR by 75 basis points and repo rate

by 50 basis points

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In the WPI gauge, core inflation(excluding food and fuel)

has 55% weightage and non-core has 45% weightage.

Basically, 55% of the index is growing at below 5% rate

and rest above 10%

Supply Demand Mismatch

Depreciation of Rs and Increasing Imports

Fiscal Deficit

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Cut Repo Rate

Boost Economic Growth

GDP all time low to 5.3%

Boost Investments IIP 2.4 from 7.6 in May 11

Consumption Growth

5.4% from 8.1% in 2010-

11 Follow People Bank of

China and Bank of Korea

Dont Do That

Inflation still too high

WPI 7.25

CPI 10.02 Detrimental effect of Bad

Monsoon

Increasing Prices of

Crude Oil Selective Credit Control

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Cut the economy growth forecast to 6.5% from 7.3% and

raised the inflation forecast to 7% from 6.5%

RBI Governor view

Lowering rates will only increase inflationary impulses

without necessarily stimulating growth

Encourage flow of credit to the productive sector

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SLR cut will enable theoretically 62000 Crore for bankingsystem to lend to corporations and to retail segment

But will it be possible ?

To increase the investment and to boost economicgrowth , There is a need for administrative measures tofacilitate investment which will spur growth, revive capital

flows and also address the supply side causes ofinflation.

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2011-12 Monetary Policy Analysis

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