BY DR. RAGHURAM G. RAJAN, GOVERNOR
Monetary & Liquidity Measures, Major Highlights, Problems and the Changes Made To Overcome The Challenges Faced By the Economy And Expectations:-
- Monetary and Liquidity Measures:-
On the basis of assessment of current and evolving macroeconomic situation it has been decided:-
- To keep the policy repo rate unchanged at 7.25%.
- To keep the cash reserve ratio of scheduled banks at 4% of net demand and time liabilities.
- To continue to provide liquidity under overnight repos at 0.25 % of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 % of NDTL of the banking system through auctions.
- Statutory Liquidity Ratio (SLR) reduced by 50bps form 22.5% to 22% with effect from the beginning 09 August 2015.
- To continue with daily variable rate repos and reverse repos to smooth liquidity.
- The reverse repo rate under the Liquidity adjustment facility (LAF) will remain unchanged at 6.25 %, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 8.25 %. LAF is a monetary policy tool which allows banks to borrow money through repurchase agreements.
[Source- RBI WEBSITE: – https://www.rbi.org.in]
- Major Highlights:
- To check whether the recent increases in inflation including non food items are temporary or not.
- Hedging ratio has gone up from 39% in 2014 to 41% in first quarter 2015.Trying to see that there is hedging in the market for sustainability.
- Drop in oil prices taken into account, current oil price is in mid 50’s. If the price of oil stays below, it would be a positive factor for India in the long term growth.
- Develop a framework for FPI investment in Govt. Bonds.
- One set of bank licenses by the end of August 2015.
- Broad agreement between Government and RBI on what Monetary Policy Committee would look like.
- The fourth bi-monthly monetary policy statement is scheduled on 29 September 2015.
- Problems being faced and the changes being made in order to overcome these problems:-
a) Problem– Liquidity: – The ability to convert an asset to cash quickly. It is characterized by high level of trading activity.
- Looking at the GDP growth as well as inflation tells how much permanent liquidity should be infused into the market.
- Cannot control to the last rupee that processes when short term liquidity builds up or builds down.
Problem– Inflation: – Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.
- Inflationary expectations to be double digit expectations, using surveys to see changes in expectations rather than levels.
- Inflation rate expected to be 5% in the beginning of 2017 and 4% is the inflation target for Jan 2018 by understanding the inflation process and the pace of disinflation that the economy can tolerate.
- Important to watch for signs that indicate hardening of inflation expectations, that will help further in pushing up actual inflation through variety of channels, from which one is divergence of financial savings.
- Core inflation is influenced by cyclical high excess demand and structural supply constraints.
- To pick up the underlying inflation by stabilizing petrol and diesel prices.
Problem– Consumer Price Index (CPI):- A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
- Target for CPI projection of 5% in FY2017.
- Reduction in pricing power and input costs would help in terms of core inflation components of CPI, and further in achieving the target.
- The outlook for growth is improving gradually. Favorable real income effects could accrue from weaker commodity prices, in particular crude oil and a possible step-up in agricultural activity if monsoon conditions continue to improve.
- The bi-monthly policy statements of April and June indicated that the accommodative bearing of monetary policy will be maintained going forward, but monetary policy actions will be conditioned by:-
Fuller transmission by banks of the Reserve Bank’s unevenly rate reductions into their lending rates.
Developments in food prices and their management, especially the effects of the monsoon, while looking through both seasonal as well as base effects.
A continuation and even acceleration of policy efforts to release the supply side so as to make available key inputs such as power and land, as also repurposing of public spending from poorly targeted subsidies towards public investment.
- To overcome the situation of disinflation, excess capacity disinflation across variety of industries is a big factor.
- To cut inflation down in India with only a mild cost to output would bring in important change in economy.
- Help in this process would be received by:-
Govt. medium term fiscal consolidation plan.
Rebalancing towards supply constraints in infrastructure through changed expenditure policy.
Creating framework for growth for the next 10-15-20 years to make up for the slow growth over the last century with the help of new Govt. in place.
This blog is written by Alisha Jhalani (MBA-FP Student – 2015-2017), Delhi Campus.