[Economic Survey] Ch4: Monetary Policy Trends, Reforms, RBI Restructuring program

RBI Monetary policy rates Aug 2014

[Economic Survey] Ch4: Monetary Policy Trends, Reforms, RBI Restructuring program

  1. Prologue
  2. Why RBI’s monetary policy fails to control inflation?
    1. Urjit Patel: reforms in monetary policy
    2. Rajan Reforms in Monetary policy
    3. Monetary Policy Trend 2013
  3. Monetary Policy trend Jan 2014 onwards
    1. Why Rajan decreased SLR?
    2. Rajan Wisdom during press conference
  4. RBI restructuring
    1. Existing departments
    2. Five clusters
    3. Chief Operating officer (COO)
    4. Staff Posting & promotion in clusters


Chapter 4: Prices and Monetary Management. FIVE subparts

  1. Inflation indexed bonds
  2. measures of money supply
  3. Monetary policy trends, RBI restructuring
  4. Indexes’ Theory: WPI, CPI, IIP, Services index and others
  5. Indexes’ Current: Survey observations on WPI, CPI & IIP, How to combat inflation

Why RBI’s monetary policy fails to control inflation?

As per Economic Survey all of the following are responsible:

  1. government borrowings
  2. financial repression (e.g Government compelling public sector banks to invest money in G-sec beyond their SLR requirement)
  3. High level of non-performing assets (NPAs)
  4. high inflation
  5. informal finance / moneylenders.
  6. Rigidity  in reprising for fixed deposits

Urjit Patel: reforms in monetary policy

Refer to the mile-long separate article, published earlier. Click me

Gist of Urjit Patel’s recommendations:
RBI Target inflation
  • RBI should try to control inflation within 4% CPI (Combined).
  • With 2% (+/-) band = control inflation within 2 to 6% of CPI (Combined.)
RBI fix Accountability
  • Setup a monetary policy Committee to decide the monetary policy.
  • Appoint 2 outsider members, fix Accountability.
Govt.side reforms Restructure MNREGA like bogus schemes & subsidies, reduce fiscal deficit.

Rajan Reforms in Monetary policy

Before After Rajanbhai’s entry
Monetary policy was designed using “multiple-indicator” method.And within that RBI focused on WPI to measure inflation. From April 2014 onwards, Rajan decided to use CPI (Combined) as key measure of inflation- just like how Urjit Patel had recommended.
Monetary policy review was done every 45 days Every 60 days (2 months)**starting from April 2014

**You might wonder how is that a “reform”? Can’t we say Rajan is LAZY because he gives policy after 60 days instead of 45?

  • Ans. No. it takes time for RBI’s monetary policy to show impact on credit market. Just like medicines also take time to show impact on body.
  • Rajan felt that 45 days was too soon, if we wait for a few more days,  we get better picture of our previous policy’s impact and then new policy could be designed more effectively. Hence 2 months. Uriit Patel recommended the same.

Monetary Policy Trend 2013

As such RBI did not relax the repo rate but still they injected truckload of cash in the system:

Tool Money injected in the economy
OMO 52,000 cr.
MSF, LAF, Repo 91,800 cr
Total (2013-14) 1,43,800 cr. injected
  • Open market operations (OMO) i.e. purchase and sale of Government securities by RBI . In above table, we can see RBI would have paid ~52k crore to purchase G-sec from juntaa. (only then money will be injected- right!)
  • Liquidity adjustment facility (LAF) i.e. repo and reverse repo rate. (meant for all clients of RBI – banks, Non-banking financial institutions and both State and union Government)
  • Marginal standing facility – meant only for Scheduled commercial banks. BUT RBI had to put some restrictions on it to contain volatility in forex market, after rumor of Fed Tapering. (eg. For the given week, banks can’t borrow above 0.5% of their net time and demand liabilities)
  • beyond this, the trend of monetary policies from 2008 to 2013, is already discussed click me

Survey observes:

  • Inflation should  moderate during 2014-15
  • Then RBI will have freedom to ease the monetary policy i.e. reducing repo rate.

Monetary Policy trend Jan 2014 onwards

  • Let’s check policies From Jan.2014 onwards
Time BankRate MSF Repo ReverseRepo SLR CRR
Dec 2013 9 8.75 7.75 6.75 23 4
Jan 2014 9 9 8 7 23 4
  • Rajan raised repo rate because core WPI had increased.
  • But Rajan promised he won’t raise repo rate beyond 8%
  • After this he made no changes anywhere EXCEPT SLR in last two polices.

RBI Monetary policy rates Aug 2014

Bi-monthlyPolicy number 2014 BankRate MSF Repo ReverseRepo SLR CRR
first April 9 9 8 7 23 4
second June 9 9 8 7 22.5* 4
third August 9 9 8 7 22* 4
fourth Sept,30

*Why Rajan decreased SLR?

  • Decrease in statutory liquidity ratio = banks will have to invest less amount of money in Government securities (G-sec).
  • Result? They’ll have more money to loan in other productive sectors of economy.
  • Why did RBI permit this? Because Government promised “fiscal consolidation” =reducing fiscal deficit.
  • Meaning, Government will borrow less in future and since Government plans to borrow less (via G-sec) therefore Rajan decided to reduce SLR. Let the money be used for other sectors of economy.

Rajan Wisdom during press conference

My inflation targets are
Time CPI (Combined) Target
January 2015 8%
January 2016 6%

I’m worried that inflation will continue BECAUSE

  1. 60% chance of El-nino
  2. Geo-political problems in Middle east (Iraq-ISIS, Israel-Palestine) and their negative impact on crude oil prices
  3. IF Government INCREASES the MSP and fuel-fertilizer subsidies (for votebank politics)
My projections about GDP and CAD Are
GDP  growth %
2013-14 Below 5%
2014-15 5-6%

CAD projections: 2% of GDP

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