Effect on Economy Due to Change in Rbi Policy

Shivans gupta PGPFM nifm- Faridabad Shivans gupta PGPFM nifm- Faridabad picture of Monetary Policy of run batted in on thrift Effect of Monetary Policy of rbi on Economy 2012 2012 Effect of Change in fiscal insurance of rbi on Economy Economy An thriftconsists of theeconomic systemsof a country or other area thelabour,capital, andlandresources and themanufacturing, production,trade,distribution, andconsumptionofgoodsand ope lay of that area.A given economy is the result of a process that involves itstechnological evolution,historyandsocial organization, as wellspring as itsgeography,natural resource endowment, andecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions. Repo ramble Repo locate is the roam at which RBI lends to commercialised depository financial institutions gener in ally against g all overnment securities. Reduction in Repo appreciate helps the commercial chamfers to get silver at a cheaper order and plus in Repo consec govern discourages the commercial brinks to get coin as the direct increases and becomes expensive.As the place are high the availability of credit and pick out decreases resulting to decrease in pomposity. abandon Repo rate Reverse Repo rate is the rate at which RBI borrows capital from the commercial banks. The increase in the Repo rate impart increase the cost of borrowing and bestow of the banks which will discourage the public to borrow specie and will encourage them to deposit. coin Reserve Ratio property Reserve Ratio is a certain fortune ofbank depositswhich banks are required to keep with RBI in the form of reserves or balances . Higher the CRR with the RBI lower will be the liquidityin the system and vice-versa.RBI is em government agencyed to diversify CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of October 2012, the CRR is 4. 5 percent. Statutory liquidity Ratio Every financial institute have to represent a certain amount of liquid assets from their time and demand liabilities with the RBI. These liquid assets washbasin be cash, uncommon metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed asStatutoryLiquidityRatio. There was a reduction from 38. % to 25% because of the suggestion by Narshimam Committee. The current SLR is 23%. slang rate Bank rate, as well as referred to as thediscount rate, is therate of enlivenwhich acentral bankcharges on the loans and advances to acommercial bank. Whenever the banks have any shortage of funds they can borrow it from the central bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing f rom the central bank becomes more expensive.It is more applicable when in that location is a liquidity crunch in the foodstuff. ostentatiousness Ineconomics,inflationis a rise in the generallevel of pricesof goods and services in an economy over a period of time. 1When the general price level rises, each unit of currency buys few goods and services. Consequently, inflation also reflects an erosion in thepurchasing powerof money a loss of real cling to in the internal medium of exchange and unit of account in the economy. A chief prise of price inflation is theinflation rate, the annualized percentage change in a generalprice tycoon(normally theConsumer Price Index) over time. thoroughgoing(a) domestic product(GDP) Gross domestic product(GDP) is themarket valueof all officially recognized final goods and services produced within a country in a given period. GDPper capitais often considered an indicator of a countrysstandard of living GDP per capita is not a stripe of persona l income (SeeStandard of living and GDP). Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita (SeeGross domestic income). GDP is related tonational accounts, a subject inmacroeconomics. GDP is not to be conf employ withGross National Product(GNP) which allocates production based on ownership. worry rate An absorb rateis the rate at whichinterestis paid by a borrower for the use of money that they borrow from alender. Specifically, the interest rate (I/m) is a percent of principal (I) paid at some rate (m). For example, a exquisite company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a pre checkerd interest rate for deferring the use of funds and instead lending it to the borrower. Interest evaluate are normally expressed as apercentageof theprincipalfor a period of one class. Money add togetherIneconomics, themoney supplyormoney stock, is the union amount ofmonetary a ssets for sale in aneconomyat a specific time. There are several ship canal to define money, but standard measures usually includecurrencyin circulation anddemand deposits(depositors easily accessed assets on the books of financial institutions). Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private celestial sphere analysts have long monitored changes in money supply because of its possible make on theprice level,inflation, theexchange rateand thebusiness cycle.Relation between two variables Interest rates & investments Interest rates & the bond prices are inversely related to each other. When interest rates move up, it causes the bond prices to fall & vice versa. Say for example, you have a bond, which is yielding 10% now. Suddenly, the interest rates in the economy move up to 11%. Now your bond is giving fewer yields than the market return. Obviously it price is going to fall in such a graphic symbol. Re verse is the case when interest rates fall, the bond price will move up because it is giving more returns than the market return.So movements in interest rates have serious implications for individual investments. Inflation and economy Inflation effects the economy on three sides. One, it is directly linked tointerest rates. The interest rates prevailing in an economy at any point of time are nominal interest rates, i. e. , real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease in purchasing power of every rupee earned on account of interest in the future, and so the interest rates must include a premium for expected inflation.In the long run, other things being equal, interest rates rise one for one with rise in inflation. Money supply and the economy Money supply also effects the economy on three sides. One, money supply is used to control theinflation in an economy. On the demand side, whenever money supply in the economy increases, con sumer-spending increases right off in the economy because of increased money in the system. But supply cant vary in the short term, so there is a temporary mismatch of demand & supply in the economy which exerts an upward pressure on inflation.This argument assumes that demand drives supply, which is generally the case. On the supply side, callable to an increase in demand, supply can only be increased by capacity additions. This causes the cost of production to rise & that is reflected in inflation. Two, money supply also has a direct relationship with the ingathering of an economy. Until an economy reaches full employment level, the economy return is the difference between money supply growth rate & the inflation, other things being equal. When an economy reaches full employment level, the growth in money supply is set off by a growth in inflation, other things being equal.This happens because output cant rise after full employment & therefore inflation increases one for one with the money supply. Three, money supply also has a relationship withinterest rates. One variable can be used to control the other. Both cant be controlled simultaneously. If the RBI wants to peg the interest rate at a certain level, it has to supply whatever money is demanded at that level of interest rate. If it wants to micturate the money supply at a certain level, the demand & supply of money will determine the interest rates. Usually it is easier for RBI to control the interest rates through its open market trading operations (OMO).So, the money supply is allowed to vary but RBI controls it by playing around with interest rates through its OMO. Cash Reserve Ratio (CRR) & statutory liquidity ratio (SLR) and an economy CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets & SLR is the percentage of its total deposits a bank has to keep in approved securities. The purpose of CRR & SLR is to keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, it increases the money available for credit in the system. This eases the pressure on interest rates & interest rates move down.Also when money is available & that too at lower interest rates, it is given on credit to the industrial sector which pushes the economic growth. Monetary policy and economy It refers to a regulatory policy whereby the monetary authority of a country maintains its control over the money supply for the realization of general economic objectives. It involves manipulation of money supply, the level & structure of interest rates & other conditions effecting the level of credit. The central bank signals the market intimately the availability of credit & interest rates through this policy.The RBI fixes the bank rate in this policy which forms the basis of the structure of interest rates & the CRR & SLR, which determines the availability of credit & the level of money supply in the economy. So it plays a very important rol e in the development of a economy. Practical summary of the Research Table of different Monetary arrays DATE Reverse Repo ramble Repo Rate CRR SLR Bank Rate Mar-10 3. 5 5 6 24 6 May-10 3. 75 5. 5 6 24 6 Jul-10 4 6 6 24 6 Sep-10 4. 5 6 6 24 6 Nov-10 5 6. 5 6 24 6 Jan-11 5. 5 7 6 24 6 Mar-11 5. 75 7. 25 6 24 6May-11 6 7. 5 6 24 6 Jul-11 6. 5 8 6 24 6 Sep-11 7 8. 5 6 24 6 Nov-11 7. 75 8. 5 5. 5 24 6 Jan-12 7. 75 8. 5 4. 75 24 6 Mar-12 7. 75 8. 5 4. 75 24 6 May-12 7 8 4. 75 23 9 Effect of change in Repo rate on bank Prime Lending Rate Prime Lending Rate Dates ICICI SBI Repo rate 20-Apr-12 18. 5 14. 5 8 04-01-2012 18. 75 14. 75 8. 5 13-Aug-11 18. 75 14. 75 8 04-Jul-11 18. 25 14. 25 8 07-May-11 18 14 7. 75 24-Feb-11 17. 5 13 7. 25 03-Jan-11 17 12. 75 7 06-Dec-10 16. 75 12. 5 6. 5 18-Aug-10 16. 25 12. 25 6 As the repo rate and reverse repo rate have direct impact on bank prime lending rate. From form 2010 to 2012 the repo rate keeps on increase from 6 to 8. 5 the PLR of SBI an d ICICI also increasing from 12. 25 to 14. 75 and from 16. 25 to 18. 75 respectively. But as the RBI cut down its Repo Rate by . 50 points the PLR of banks also down by . 25 points. preserve of change in CRR and SLR on Money Supply As the CRR is same in 2010-11, 2011-12 i. e 6%, there is not so much change in money supply it is in between 15000-16000. But as it dent to decrease in 4th quarter of 2011-12 money supply start increasing and cross to 16000.And in Ist quarter of 2012-13, CRR become 4. 75 and SLR become 23% then Money supply is 17500 cr. in Indian Economy. Reverse Repo Rate Repo Rate Bank Rate CRR SLR money supply 5. 75 6 6 6 24 15100 5. 25 6. 25 6 6 24 15100 5. 5 6. 5 6 6 24 15100 6. 5 7. 5 6 6 24 15100 7 8 6 6 24 16000 7. 5 8. 5 6 6 24 16000 7. 5 8. 5 6 5. 5 24 16000 7. 5 8. 5 6 4. 75 24 16000 7 8 9 4. 75 23 17500 Effect on Increase in Money supply on Inflation As Money supply increases in the economy, there is more money in the market hich finally i ncrease the purchasing power of people. Because of increase in purchasing power the cost of production increases and in conclusion Inflation rate increases. So money supply in 2012-13 increases to 17500 cr. The inflation rate become 10. 05 from 8. 65. Reverse Repo Rate Repo Rate Bank Rate CRR SLR money supply inflation rate 5. 75 6 6 6 24 15100 11. 99 5. 25 6. 25 6 6 24 15100 10. 55 5. 5 6. 5 6 6 24 15100 10. 23 6. 5 7. 5 6 6 24 15100 9. 56 7 8 6 6 24 16000 8. 86 7. 5 8. 5 6 6 24 16000 10. 06 7. 8. 5 6 5. 5 24 16000 6. 49 7. 5 8. 5 6 4. 75 24 16000 8. 65 7 8 9 4. 75 23 17500 10. 05 Impact of Repo rates, CRR and of Money supply on GDP harvest Rate Data categories and cistrons units 2010-11 2011-12 2012-13 GDP(Current market price) in rs. 7674148 8912178 159527986 Growth rate in % 18. 1 16. 1 16. 9 As we see that our GDP growth rate start decreasing because of increasing rates. Because there is money declination in the market the purchasing power of people an d our production starts declining which ultimately effect on our GDP growth.But as in financial year 2012-13 the RBI cut its rate by . 50 then our GDP growth rate increase by . 8 %. Conclusion RBI increase or decrease the rates i. e. repo rate, reverse repo rate, Cash reserve ratio, statutory liquidity ratio to control the money supply in the economy. As this small change in these ratios affect a lot on the whole economy and its various component like on investment index, cost of production, inflation, interest rate, exchange rate, prime lending rate of bank, mob loan and car loan rate, deposit rate of bank and etc.In first quarter of financial year 2012-13, RBI decrease the repo rate by, reverse repo by, CRR by, SLR by the ultimate objective of this reduction in rate is to increase the money supply in the economy. As the rate decline in 2012-13, the RBI plow 17500 cr. In the market. But this increase in money supply increase the purchasing power of consumer which ultimately effe ct on inflation and hence inflation also increase. But because of decrease in rates, it is favourable to take more loan for the corporate which increase their production and in result of this our GDP also increase by . %. The prime lending rate is directly proportional to the repo rate of RBI. So there is a fall also come in prime lending rate of banks by . 25 points because of decrease in repo rate by . 50 So, The change in monetary policy of RBI affect many other rates and and which also affect the consumer and these rates are the instrument of RBI to control the money supply in the economy. Bibliography * www. rbi. org. in * www. indiabudget. nic. in * www. wikipedia. org * www. simpletaxindia. net * www. karvy. com * www. tradingeconomics. com