Monetary Policy 2011

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AN

Assignment Report

On

BUSSINESS ETHICS AND ETHOS

Titled

Current Ethical Issues in Indian Society

Submitted in partial fulfillment for theAward of degree of

Master of Business Administration

Submitted By: - Submitted To:-

Aman Gupta Mr. Ankur Rastogi SirMBAPart IV

2010-2012


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AN

Assignment Report

On

BANKING SERVICE OPERATION

Titled

Analysis of Monetary Policy 2011





2010-2012


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AN

Assignment Report

On

Marketing of Services

Titled

Study ofTATA AIG INSURANCE COMPANY





2010-2012


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WHAT IS MONETARY POLICY?

Monetary policy is the management of money supply and interest rates by central banks toinfluence prices and employment. Monetary policy works through expansion or contraction of

investment and consumption expenditure.

Monetary policy is the process by which the government, central bank (RBI in India), or monetaryauthority of a country controls

(i) the supply of money(ii) availability of money(iii) cost of money or rate of interest , in order to attain a set of objectives oriented towards the

growth and stability of the economy. Monetary theory provides insight into how to craftoptimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy,where an expansionary policy increases the total supply of money in the economy, and acontractionary policy decreases the total money supply. Expansionary policy is traditionally usedto combat unemployment in a recession by lowering interest rates, while contractionary policyinvolves raising interest rates in order to combat inflation. Monetary policy is contrasted withfiscal policy, which refers to government borrowing, spending and taxation

WHY IT IS NEEDED?

What monetary policy at its best can deliver is low and stable inflation, and thereby reduces the

volatility of the business cycle. When inflationary pressures build up, it is monetary policy onlywhich raises the short-term interest rate (the policy rate), which raises real rates across theeconomy and squeezes consumption and investment.The pain is not concentrated at a few points, as is the case with government interventions incommodity markets.

Monetary policy in India underwent significant changes in the 1990s as the Indian Economybecame increasing open and financial sector reforms were put in place. In the 1980s, monetarypolicy was geared towards controlling the quantum, cost and directions of credit flow in theeconomy. The quantity variables dominated as the transmission Channel of monetary policy.Reforms during the 1990s enhanced the sensitivity of price signals from the central bank, makinginterest rates the increasingly Dominant transmission channel of monetary policy in India.

WHEN WERE MONETARY POLICIES INTRODUCED?

Monetary policy is primarily associated with interest rate and credit. For many centuries there wereonly two forms of monetary policy:


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(i) Decisions about coinage(ii) Decisions to print paper money to create credit.

Interest rates, while now thought of as part of monetary authority, were not generally coordinatedwith the other forms of monetary policy during this time. Monetary policy was seen as an

executive decision, and was generally in the hands of the authority with seigniorage, or the powerto coin. With the advent of larger trading networks came the ability to set the price between goldand silver, and the price of the local currency to foreign currencies. This official price could beenforced by law, even if it varied from the market price.

With the creation of the Bank of England in 1694, which acquired the responsibility to print notesand back them with gold, the idea of monetary policy as independent of executive action began tobe established.The goal of monetary policy was to maintain the value of the coinage, print noteswhich would trade at par to specie, and prevent coins from leaving circulation. The establishmentof central banks by industrializing nations was associated then with the desire to maintain thenation's peg to the gold standard, and to trade in a narrow band with other gold-backed currencies.

To accomplish this end, central banks as part of the gold standard began setting the interest ratesthat they charged, both their own borrowers, and other banks who required liquidity. Themaintenance of a gold standard required almost monthly adjustments of interest rates.

During the 1870-1920 period the industrialized nations set up central banking systems, with one ofthe last being the Federal Reserve in 1913.By this point the role of the central bank as the "lenderof last resort" was understood. It was also increasingly understood that interest rates had an effecton the entire economy, in no small part because of the marginal revolution in economics, whichfocused on how many more, or how many fewer, people would make a decision based on a changein the economic trade-offs. It also became clear that there was a business cycle, and economictheory began understanding the relationship of interest rates to that cycle. (Nevertheless, steering a

whole economy by influencing the interest rate has often been described as trying to steer an oiltanker with a canoe paddle.) Research by Cass Business School has also suggested that perhaps itis the central bank policies of expansionary and contractionary policies that are causing theeconomic cycle; evidence can be found by looking at the lack of cycles in economies beforecentral banking policies existed.

OBJECTIVES OF MONETARY POLICYThe objectives are to maintain price stability and ensure adequate flow of credit to the productivesectors of the economy. Stability for the national currency (after looking at prevailing economicconditions), growth in employment and income are also looked into. The monetary policy affectsthe real sector through long and variable periods while the financial markets are also impactedthrough short-term implications.

There are four main 'channels' which the RBI looks at:

Quantum channel: money supply and credit (affects real output and price level throughchanges in reserves money, money supply and credit aggregates).


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Inflation targeting

Under this policy approach the target is to keep inflation, under a particular definition such asConsumer Price Index, within a desired range.

The inflation target is achieved through periodic adjustments to the Central Bank interest ratetarget. The interest rate used is generally the interbank rate at which banks lend to each otherovernight for cash flow purposes. Depending on the country this particular interest rate might becalled the cash rate or something similar.

The interest rate target is maintained for a specific duration using open market operations.Typically the duration that the interest rate target is kept constant will vary between months andyears. This interest rate target is usually reviewed on a monthly or quarterly basis by a policycommittee

Price level targeting

Price level targeting is similar to inflation targeting except that CPI growth in one year is offset insubsequent years such that over time the price level on aggregate does not move.

Something similar to price level targeting was tried by Sweden in the 1930s, and seems to havecontributed to the relatively good performance of the Swedish economy during the GreatDepression. As of 2004, no country operates monetary policy based on a price level target.

Monetary aggregates

In the 1980s, several countries used an approach based on a constant growth in the money supply.

This approach was refined to include different classes of money and credit (M0, M1 etc). In theUSA this approach to monetary policy was discontinued with the selection of Alan Greenspan asFed Chairman.

This approach is also sometimes called monetarism.

While most monetary policy focuses on a price signal of one form or another, this approach isfocused on monetary quantities.

Fixed exchange rate

This policy is based on maintaining a fixed exchange rate with a foreign currency. There arevarying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixedexchange rate is with the anchor nation.

Under a system of fiat fixed rates, the local government or monetary authority declares a fixedexchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate isenforced by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In thiscase there is a black market exchange rate where the currency trades at its market/unofficial rate.


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Under a system of fixed-convertibility, currency is bought and sold by the central bank ormonetary authority on a daily basis to achieve the target exchange rate. This target rate may be afixed level or a fixed band within which the exchange rate may fluctuate until the monetaryauthority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (Inthis case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed

exchange rate with bands where the bands are set to zero.)

Under a system of fixed exchange rates maintained by a currency board every unit of localcurrency must be backed by a unit of foreign currency (correcting for the exchange rate). Thisensures that the local monetary base does not inflate without being backed by hard currency andeliminates any worries about a run on the local currency by those wishing to convert the localcurrency to the hard (anchor) currency.

These policies often abdicate monetary policy to the foreign monetary authority or government asmonetary policy in the pegging nation must align with monetary policy in the anchor nation tomaintain the exchange rate. The degree to which local monetary policy becomes dependent on the

anchor nation depends on factors such as capital mobility, openness, credit channels and othereconomic factors

Gold standard

The gold standard is a system in which the price of the national currency as measured in units ofgold bars and is kept constant by the daily buying and selling of base currency to other countriesand nationals. (i.e. open market operations, cf. above). The selling of gold is very important foreconomic growth and stability.

The gold standard might be regarded as a special case of the "Fixed Exchange Rate" policy. Andthe gold price might be regarded as a special type of "Commodity Price Index".

Today this type of monetary policy is not used anywhere in the world, although a form of goldstandard was used widely across the world prior to 1971. For details see the Bretton Woodssystem. Its major advantages were simplicity and transparency.

Monetary policy tools

Monetary base

Monetary policy can be implemented by changing the size of the monetary base. This directlychanges the total amount of money circulating in the economy. A central bank can use open marketoperations to change the monetary base. The central bank would buy/sell bonds in exchange forhard currency. When the central bank disburses/collects this hard currency payment, it alters theamount of currency in the economy, thus altering the monetary base.


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Reserve requirements

The monetary authority exerts regulatory control over banks. Monetary policy can be implementedby changing the proportion of total assets that banks must hold in reserve with the central bank.Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the

rest is invested in illiquid assets like mortgages and loans. By changing the proportion of totalassets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds.This acts as a change in the money supply. Central banks typically do not change the reserverequirements often because it creates very volatile changes in the money supply due to the lendingmultiplier.

Discount window lending

Many central banks or finance ministries have the authority to lend funds to financial institutionswithin their country. By calling in existing loans or extending new loans, the monetary authoritycan directly change the size of the money supply.

Interest rates

The contraction of the monetary supply can be achieved indirectly by increasing the nominalinterest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. The Federal Reserve can set the discount rate, as well as achieve the desiredFederal funds rate by open market operations. This rate has significant effect on other marketinterest rates, but there is no perfect relationship. In the United States open market operations are arelatively small part of the total volume in the bond market. One cannot set independent targets forboth the monetary base and the interest rate because they are both modified by a single tool open market operations; one must choose which one to control.

In other nations, the monetary authority may be able to mandate specific interest rates on loans,savings accounts or other financial assets. By raising the interest rate(s) under its control, amonetary authority can contract the money supply, because higher interest rates encourage savingsand discourage borrowing. Both of these effects reduce the size of the money supply.

Currency board

A currency board is a monetary arrangement which pegs the monetary base of a country to that ofan anchor nation. As such, it essentially operates as a hard fixed exchange rate, whereby local

currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus,to grow the local monetary base an equivalent amount of foreign currency must be held in reserveswith the currency board. This limits the possibility for the local monetary authority to inflate orpursue other objectives. The principal rationales behind a currency board are three-fold:

1. To import monetary credibility of the anchor nation;2. To maintain a fixed exchange rate with the anchor nation;


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3. To establish credibility with the exchange rate (the currency board arrangement is the hardestform of fixed exchange rates outside of dollarization).

In theory, it is possible that a country may peg the local currency to more than one foreign currency;although, in practice this has never happened (and it would be a more complicated to run than a

simple single-currency currency board).

As expected, the Reserve Bank of India has raised its benchmark Repo rate (under its LiquidityAdjustment Facility or LAF) by 25 basis points to 7.50 per cent when it announced the mid-quartermonetary policy on June 16, 2011. The new rate is with immediate effect. The Reverse Repo rateunder LAF and the interest rate under Marginal Standing Facility are linked to Repo rate. As such,both the Reverse Repo rate and Marginal Standing Facility rate stand increased to 6.50 per cent (oneper cent below Repo rate) and 8.50 per cent (one per cent above Repo rate) respectively withimmediate effect.

Since the beginning of year 2010, RBI has been increasing the interest rates continuously. The latest

Repo rate hike is tenth increase since March 2010 when RBI increased Repo rate from 4.75 per centto 5.00 per cent the cumulative increase in Repo rate amounts to 275 basis points (or 2.75 per cent)in the last 15 months.RationaleWhat is the rationale behind RBIs latest increase in rates? Inflation rate of 9.1 per cent (provisionalfigure) remains at highly uncomfortable levels due mainly to high commodity prices Non-foodmanufactured goods prices have gone up in May 2011 in addition to higher inflation of food articlesManufacturers are passing on the increase in wage cost and service cost to consumers as is evident inthe inflation indices Private consumption is at higher levels even though there is some decelerationin some sectors, like, automobiles


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The present rate hike from RBI is on the expected lines. The stock market as well as the bond markethas weakened considerably well before the announcement of the RBIs rate hike. In its AnnualPolicy announced on May 3rd this year, RBI raised the Repo rate by 50 basis points in one go. Afterthe Annual Policy announcement, commercial banks were quick to increase their lending rates

suggesting strong monetary policy transmission, which indicates the ability of the RBI to pass on itspolicy initiatives to the broader economy. On June 16, 2011, the benchmark Sensex closed at 17,986down 0.81 per cent over the previous days close and the Nifty was down at 5,397. The downtrend islikely to continue till the next policy announcement by RBI. One can expect Sensex to drift downanother 10 per cent from the current 18,000-level. The bond market too had been reacting negativelyin the last six weeks or so to the expected increase in RBI rate hikes. The benchmark 7.80 per cent10-year Government of India security maturing in 2021 was showing signs of weakness till thepolicy announcement yesterday. But, after the rate hike announcement mid-day, the bond prices havegone up and the benchmark papers yield declined to 8.30 per cent from 8.38 per cent the previousday (bond prices move in opposite direction to bond yields). The future for Government bond priceslooks weak now. Commercial banks have been enjoying good net interest margins. As such, they

may absorb some of the present rate hike themselves while some portion of the burden will bepassed on to borrowers. Banks may increase their deposit rates also depending on the credit offtake.Overall, borrowers can expect rate increases in home loans, car loans, coporate loans, etc. This inturn will adversely affect domestic consumption.OutlookIt is not clear whether the RBIs actions in the last 15 to 18 months have been able to containinflationary expectations even as GDP growth rate has moderated to 7.8 per cent in the January-March 2011 quarter from 9.4 per cent in January-March 2010 quarter. There is visible slowdown inmanufacturing as indicated in the Industrial Index of Production (IIP). In the month of April 2011,IIP is at a sober level of 6.3 per cent. However, the apprehensions regarding the effectiveness ofmonetary policy in containing growth-induced inflation remain unanswered at this point of time.Diesel price may be increased by the Government as the fiscal deficit may go out of control this yeardue to higher cost of imported crude oil. The subsidy burden of diesel, LPG and kerosene is tooheavy for the Government. The liquidity situation seems to be comfortable now. Credit growth isaround 21 per cent year-on-year above the RBIs indicative projection of 19 per cent. The monsoonis most likely to be normal this year providing some hope on the food inflation front.


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With stock markets languishing in sideways to downward trend, it remains to be seen whether theGovernment will be able to go ahead with its disinvestment programme. If it fails to raise additionalmoney through disinvestment, its hold on the fiscal situation will deteriorate leading to higher fiscaldeficit. Higher fiscal deficit may translate into higher interest rates in future. If the Government

increases diesel prices, it may further accentuate inflationary expectations in the economy. Thefinancial markets have been expecting another rate hike of a minimum of 50 75 basis points beforethe end of this fiscal year. However, what needs to be emphasized is that RBI will be keenlywatching the important data, like, inflation, GDP growth, tax collections, disinvestment of publicsector companies, oil prices, global cues, and others, before making further moves on its fightagainst inflation monster. In the last 15 months, RBI has been increasing interest rates as per marketexpectations as inflationary pressures have been building up in the economy. But the same cannot besaid for the future RBIs moves on interest rates. Next time, we need to expect the unexpected fromRBI. Even though many experts and analysts have been expecting 50 to 75 basis points increase, weneed to keep our fingers crossed and keep a close eye on data.

Repo rate: The overnight rate at which banks borrow money from RBI by pledging Governmentsecurities with RBI Reverse Repo rate: The overnight rate given by RBI to banks when the latterkeep their surplus funds with RBI (one per cent below Repo rate) Marginal Standing Facility (MSF):Banks can borrow overnight from the RBIs MSF up to one per cent of their respective net demandand time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100basis points (one per cent) above the repo rate. LAF RBIs Liquidity Adjustment Facility RBI Reserve Bank of India, LPG Liquefied Petroleum Gas GDP Gross Domestic Product or nationalincome IIP Index of Industrial Production Disclaimer: The views of the author are personal. Theauthor writes copiously on financial markets equities, bonds, currencies, taxes, Indian economy,etc.

Monetary Policy

I. The State of the Economy

Global Economy

1. Economic activity in advanced economies weakened further during Q3 of 2011 (July-September). Escalating concerns over medium-term sovereign debt dynamics in the euro area and,in particular, substantial potential losses to banks holding this debt have impacted global financialmarkets enormously. The adverse feedback loops among sluggish growth, weak sovereign balancesheets, large exposures of banks to sovereign debt and political compulsions coming in the way ofa credible solution have created a crisis of confidence, which is a potential threat to regional andglobal financial stability.

2.. High prices of crude oil and other commodities, persistently high unemployment and weakhousing markets continued to impact consumer confidence and private consumption. Fiscaltightening, driven by medium-term sovereign debt concerns, also contributed to the loss in thegrowth momentum. This is reflected in the fall in the global manufacturing purchasing managers'index (PMI) to 49.9 in September, its lowest level since June 2009.


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9. The above factors also had a knock-on impact on major EMEs. According to the IMF, globalgrowth decelerated from 4.3 per cent year-on-year (y-o-y) in Q1 of 2011 to 3.7 per cent in Q2, andfurther to an estimated 3.6 per cent in Q3, as growth in advanced economies fell from 2.2 per centto 1.5 per cent and 1.3 per cent over the same period. risk for infl ation.

10. Significantly, the weaker global growth since Q2 has resulted in only a small correction ininternational commodity prices, particularly crude oil. Brent and Dubai Fateh prices (whichcomprise the Indian basket) have declined only modestly. The World Bank's September 2011indices of energy prices were higher by 32 per cent (y-o-y) and of non-energy by 17 per cent.

11. Reflecting the above trend, headline measures of inflation remained above the comfortzones/targets in both advanced economies and EMEs. In the case of EMEs, strong domesticdemand pressures added to inflationary pressures. Amongst major economies, headline consumerprice inflation (y-o-y) in September 2011 was 3.9 per cent in the US, 3.0 per cent in the euro area,5.2 per cent in the UK, 6.1 per cent in China, 7.3 per cent in Brazil and 6.2 per cent in Turkey. Inresponse to turbulent global conditions and domestic considerations, central banks in major EMEs

have displayed a variety of responses, depending on their specific macroeconomic conditions.

Domestic Economy

3. GDP growth decelerated to 7.7 per cent in Q1 (April-June) of 2011-12 from 8.8 per cent a yearago, and 7.8 per cent in Q4 of 2010-11. From the supply side, the deceleration in growth in Q1 wasmainly due to slower growth in mining, manufacturing, construction and 'community, social andpersonal services'.

4. Rainfall during the south-west monsoon was one per cent above normal. The Reserve Bank'sproduction weighted rainfall was also one per cent above normal. The first advance estimates forthe 2011-12 kharif season point to record production of rice, oilseeds and cotton. However, theoutput of pulses may decline due to a reduction in acreage.

5. Industrial growth, as measured by the index of industrial production (IIP), decelerated to 5.6 percent during April-August 2011 from 8.7 per cent in the corresponding period of the previous year.This was mainly on account of slowdown in capital goods, intermediate goods and consumerdurables. Growth of eight core infrastructure industries during April-August 2011 also sloweddown to 5.3 per cent from 6.1 per cent in the corresponding period of last year.

6. According to the Reserve Bank's order books, inventories and capacity utilisation survey(OBICUS), capacity utilisation moderated during Q1 of 2011-12 compared with the previousquarter. Business sentiment, as indicated by the business expectations index of the Reserve Bank'sindustrial outlook survey, declined in Q2 of 2011-12 and showed further moderation for thefollowing quarter. PMI indices for both manufacturing and services declined during September2011.

7. Based on an analysis of a sample of 2,426 non-financial companies, margins of corporates in Q1of 2011-12 moderated across sectors compared with their levels in Q4 of 2010-11. A classificationof companies into the use-based segments of the IIP indicated that the intermediate goods segment


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registered the maximum decline in margins, reflecting the impact of commodity prices. Othersegments saw lower margin compression, suggesting that pricing power was reducing, albeitgradually. Early results for Q2 of 2011-12 (of 161 companies analysed till October 20, 2011)suggest that both sales growth and margins moderated marginally.

8. Y-o-Y headline WPI inflation has remained stubbornly high during the financial year so far,averaging 9.6 per cent. Inflation was driven by all the three major groups, viz., primary articles;fuel and power; and manufactured products. As indicated in the First Quarter Review, both thelevel and persistence of inflation remain a cause of concern. However, there is some comfortcoming from de-seasonalised sequential quarterly WPI data which suggest that inflationmomentum has turned down.

9. Y-o-Y primary food inflation was 9.2 per cent in September 2011 as compared with 9.6 per centin August. The elevated level of primary food inflation was mainly on account of increase in pricesof vegetables, milk and pulses.

10. Y-o-Y fuel-group inflation increased from 12.8 per cent in August 2011 to 14.1 per cent inSeptember mainly due to the increase in petrol prices and upward revision in electricity prices.

11. Y-o-Y non-food manufactured products inflation was 7.6 per cent in September as comparedwith 7.7 per cent in August; it was 7.0 per cent in April. This should be seen in comparison withthe average non-food manufactured product inflation of a little over 4.0 per cent during the last sixyears. The current high level reflects a combination of high commodity prices and persistentpricing power as evidenced from the early corporate results of Q2 of 2011-12.

12. Y-o-Y inflation as measured by the consumer price index (CPI) for industrial workers, whichhad moderated during April-July 2011, rose to 9.0 per cent in August reflecting increase in foodprices. The new combined (rural and urban) CPI (Base: 2010=100) rose to 113.1 in Septemberfrom 111.7 in August. Inflation based on other CPIs was in the range of 9.3 to 9.4 per cent duringSeptember.

13. Y-o-Y money supply (M3) growth moderated from 17.2 per cent at the beginning of thefinancial year to 16.2 per cent on October 7, 2011. This level, however, was still higher than theindicative projection of 15.5 per cent for 2011-12, essentially reflecting the growth in bankdeposits as term deposit rates increased. In turn, this has resulted in moderation in currencygrowth.

14. Although non-food credit growth decelerated from 22.6 per cent on a y-o-y basis in April to19.3 per cent on October 7, 2011, it was still running higher than the indicative projection of 18 percent set out in the First Quarter Review of Monetary Policy 2011-12. Disaggregated data on afinancial year basis (April-September) show that credit growth to industry decelerated to 7.5 percent from 8.1 per cent in the previous year, with credit to infrastructure decelerating sharply. Therewas also deceleration in credit growth in services and personal loans. However, growth of housingloans accelerated.


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15. The estimated total flow of financial resources from banks, non-banks and external sources tothe commercial sector during the first half of 2011-12 was around Rs 5,00,000 crore, up from Rs4,80,000 crore during the same period of last year. The deceleration in bank credit was more thanoffset by higher flows from non-bank and external sources, particularly foreign direct investmentand external commercial borrowings, reflecting still buoyant demand for financial resources.

16. During the first half of 2011-12, the modal deposit rate of banks increased by 80 basis points(bps) to 7.45 per cent. The rise in deposit rates was relatively sharper for maturities up to one yearacross the banking system. During the same period, the modal Base Rate of banks increased by125 bps to 10.75 per cent.

17. Liquidity conditions continued to remain in deficit during the current financial year (up toOctober 21), consistent with the anti-inflationary stance of monetary policy. The liquidity deficit inthe system, as reflected by the daily borrowings under the liquidity adjustment facility (LAF)repos, averaged around Rs 47,000 crore till October 21, 2011. The systemic deficit thus remainedwithin one per cent of banks' net demand and time liabilities (NDTL), the comfort zone assessed

by the Reserve Bank.

18. The Central Government's key deficit indicators widened during April-August 2011. This wasdue to both deceleration in tax revenues and increase in expenditure, particularly relating tofertiliser and petroleum subsidies. The fiscal deficit during April-August 2011 was 66.3 per cent ofbudget estimates as compared with 58.4 per cent in 2010-11, even after adjusting for higher thanbudgeted spectrum receipts.

19. The Central Governmenthas announced an increase in the budgeted borrowing by about Rs53,000 crore to meet the shortfall in other financing items. Consequently, the revised gross (net)borrowings for the year work out to about Rs 5,23,000 crore (Rs 4,06,000 crore). The CentralGovernment raised 61 per cent of gross (Rs 3,20,000 crore) and 59 per cent of net marketborrowings (Rs 2,41,000 crore) up to October 14, 2011.

20. In the money market, the overnight interest rates have remained generally close to the repo rateduring 2011-12 so far. The 10-year benchmark government security yield, which remained range-bound during the first half of 2011-12, increased by 38 basis points during October 2011 (to 8.82per cent as on October 21), reflecting in part, increased government borrowings for the second halfof the year.

21. Following a period of stability in Q1 of 2011-12, equity and forex markets came under somepressure in Q2 of 2011-12 reflecting the volatility in the global financial markets. Domestic equityprices declined in recent weeks due to significant outflows by foreign institutional investors (FIIs),driven largely by global risk aversion.

22. Between March and September 2011, the 6, 30 and 36-currency trade weighted real effectiveexchange rates (REER) depreciated by 6.3 per cent, 2.0per cent and 4.1 per cent, respectively,primarily reflecting the nominal depreciation of rupee against the US dollar by 8.7 per cent. Therupee depreciated further against the US dollar by 2.3 per cent between end-September and
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October 21, 2011. It is relevant to note in this context that the Reserve Bank's exchange rate policyis not guided by a fixed or pre-announced target or band. The policy has been to retain theflexibility to intervene in the market to manage excessive volatility and disruptions tomacroeconomic stability.

23. Notwithstanding slowing and uncertain global conditions, exports grew by 47 per cent duringQ1 of 2011-12 reflecting diversification in products and destinations. During the same period,imports increased by 33 per cent largely reflecting higher oil prices. Consequently, the trade deficitwidened to US$ 35.4 billion in Q1 of 2011-12 from US$ 32.3 billion in the corresponding periodof last year. If the current trend persists, the current account deficit (CAD) as a percentage of GDPthis year may be higher than it was last year.

II. Outlook and Projections

Global OutlookGrowth

24. Global growth prospects have significantly weakened over the past few months, primarilyreflecting increased concerns over sovereign debt sustainability in some euro area countries. Thishas added to the existing vulnerabilities in the major advanced economies arising out of elevatedoil and other commodity prices, high unemployment rates, depressed consumer confidence andweak housing markets.In contrast, growth has remained relatively resilient in EMEs, notwithstanding some moderation inresponse to monetary tightening. However, a prolonged slowdown in advanced economies wouldalso weaken the growth prospects of EMEs. In its September 2011 World Economic Outlook(WEO), the IMF scaled down its projection for world GDP growth to 4.0 per cent for both 2011and 2012 from its earlier (June) projections of 4.3 per cent and 4.5 per cent, respectively.

Inflation

25. Despite significant weakening of economic activity, global commodity prices have correctedonly marginally. Supply limitations remain a key upside risk to commodity prices. According tothe IMF (WEO, September 2011), consumer price inflation is likely to increase from 1.6 per centin 2010 to 2.6 per cent in 2011 in advanced economies, and from 6.1 per cent to 7.5 per cent inemerging and developing economies.

Domestic Outlook

Growth

26. In its May and July Quarterly Review Statements, the Reserve Bank projected GDP growth of8.0 per cent for 2011-12. The mid-quarter review of September, however, pointed out that the riskto the growth projection was on the downside mainly on account of slowing down of the globaleconomy and moderating domestic demand. Slower global growth will have an adverse impact ondomestic growth, particularly on industrial production, given the rising inter-linkages of the Indianeconomy with the global economy.


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The growth in the service sector is holding up well, although some moderation is possible here tooon account of inter-sectoral linkages. Based on the normal south-west monsoon and first advanceestimates that suggest a record kharif production, agricultural prospects look good. This shouldprovide a boost to rural demand. However, investment demand has slackened reflecting slowerclearance and execution of projects, concerns about inflation and rising interest rates. On these

considerations, the baseline projection of GDP growth for 2011-12is revised downwards to 7.6 percent.

Inflation

27. Going forward, the inflation path will be shaped by both demand and supply factors. First, itwill depend on the extent of moderation in aggregate demand. Some signs of demand moderationare evident, although the impact is being felt more on the investment side.

28. Second, the behaviour of crude prices will be a crucial factor in shaping the outlook ofdomestic inflation in the near future. Despite the sluggish growth prospects of the global economy,

crude prices have moderated only marginally. Also, the benefit of decline in global crude prices inthe recent period so far has been more than offset by the depreciation of the rupee in nominalterms. Thus, the exchange rate will also have some impact on the behaviour of domestic petroleumprices.

29. Third, the inflation outlook will also depend on the supply response in respect of thosecommodities where there are structural imbalances, particularly protein items. Therefore, concertedpolicy focus to generate adequate supply response in respect of items such as milk, eggs, fish,meat, pulses, oilseeds, fruits and vegetables will play a major role in shaping the behaviour of foodinflation in the near term.30. Fourth, there is still an element of suppressed inflation as domestic prices of administeredpetroleum products do not reflect the full pass-through of global commodity prices. As the declinein crude prices has been offset by the depreciation of the rupee, under-recoveries continue to occurin respect of administered petroleum products. In addition, there are already large accumulatedunder-recoveries. Therefore, an increase in administered petroleum prices cannot be ruled out evenin a scenario of stable or declining global crude prices. In addition, there are other items such ascoal whose current prices do not reflect the underlying market conditions. Since coal is an input forelectricity, coal prices, as and when raised, will also have implications for electricity tariffs.

31. Keeping in view the domestic demand-supply balance, the global trends in commodity pricesand the likely demand scenario, the baseline projection for WPI inflation for March 2012 is keptunchanged at 7 per cent. Elevated inflationary pressures are expected to ease from December 2011,though uncertainties about sudden adverse developments remain.

32. Although inflation has remained persistently high over the past two years, it is important tonote that during the 2000s, it averaged around 5.5 per cent, both in terms of WPI and CPI, downfrom its earlier trend rate of about 7.5 per cent. Given this record, the conduct of monetary policywill continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent. Thisis in line with the medium-term objective of 3.0 per cent inflation consistent with India's broaderintegration into the global economy.


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Monetary Aggregates

33. The current trends in money supply (M3) and credit growth remain above the indicativetrajectories of the Reserve Bank. Deposit growth has been much higher this year than that in the

last year due to increase in interest rates, especially of term deposits. Credit growth showed somemoderation for a time, but thereafter it accelerated again. It is expected that monetary aggregateswill evolve along the projected trajectory indicated in the First Quarter Review of MonetaryPolicy. Accordingly, M3 growth projection for 2011-12 has been retained at 15.5 per cent andgrowth of non-food credit at 18 per cent.

As always, these numbers are indicative projections and not targets.

Risk Factors

34. The indicative projections of growth and inflation for 2011-12 are subject to several risks as

detailed below:

i) A major downside risk to growth emanates from the global macroeconomic environment. Whilegrowth in advanced economies is already weakening, there is a risk of sharp deterioration if acredible solution to the euro area debt and financial problems is not found, in which case it willimpact domestic growth through trade, finance and confidence channels.ii) Despite recent moderation, global commodity prices remain high. However, weakening ofglobal recovery has the potential to lead to significant softening of crude prices, which will havefavourable impact for both growth and inflation.iii) The Government has announced increased market borrowings, which can potentially crowd outmore productive private sector investment. The Government has indicated that this will not impactthe budgeted fiscal deficit. However, should the fiscal deficit slip from the budgeted level, it willhave implications for domestic inflation. The large fiscal deficit has been an important source ofdemand pressure. Clearly, the impact of tightening monetary policy has been diluted by theexpansionary fiscal position, which is a sub-optimal outcome.iv) Structural imbalances in protein-rich items such as egg, fish and meat will persist. In particular,production of pulses this year is expected to be lower than last year. Consequently, food inflation islikely to remain under pressure.

III. The Policy Stance

35. The Reserve Bank began exiting from the crisis driven expansionary policy in October 2009.Since then, the Reserve Bank has cumulatively raised the cash reserve ratio (CRR) by 100 basispoints, and raised the policy rate (the repo rate) 12 times by 350 basis points. The effectivetightening has been of 500 basis points as liquidity in the system transited from surplus to deficit.This monetary policy response has been calibrated on the basis ofIndia specific growth-inflationdynamics in the broader context of persistent global uncertainty.

36. Considering the persistence of inflation at a level much above the comfort zone of the ReserveBank for almost two years, the Reserve Bank persevered with its anti-inflationary stance during the
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current year.

37. The monetary policy tightening effected so far has helped in containing inflation and anchoringinflation expectations, even as both remain elevated. While the impact of past monetary actions isstill unfolding, it is necessary to persist with the anti-inflationary stance. Against that background,

the policy stance in this review is shaped by the following two major considerations.

38. First, both inflation

and inflation expectations remain high. Inflation is broad-based and above the comfort level of theReserve Bank. Further, these levels are expected to persist for two more months. Risks toexpectations becoming unhinged in the event of a pre-mature change in the policy stance cannot beignored. However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures indicate moderation, consistent with the projectionthat inflation will begin to decline beginning December 2011.

39. Second, growth is clearly moderating on account of the cumulative impact of past monetarypolicy actions as well as some other factors. As inflation begins to decline, the opportunityemerges for the policy stance to give due consideration to growth risks, within the overall objectiveof maintaining a low and stable inflation environment.

40. Against this backdrop, the stance of monetary policy is intended to:

Maintain an interest rate environment to contain inflation and anchor inflation expectations.Stimulate investment activity to support raising the trend growth. Manage liquidity to ensure that itremains in moderate deficit, consistent with effective monetary transmission.

IV. Monetary Measures

41. On the basis of current assessment and in line with the policy stance outlined in Section III, theReserve Bank announces the following policy measures:

Repo Rate42. It has been decided to increase the policy repo rate under the liquidity adjustment facility(LAF) by 25 basis points from 8.25 per cent to 8.5 per cent with immediate effect.

Reverse Repo Rate43. The reverse repo rate under the LAF, determined with a spread of 100 basis points below therepo rate, automatically adjusts to 7.5 per cent with immediate effect.

Marginal Standing Facility (MSF) Rate

44. The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points abovethe repo rate, stands recalibrated at 9.5 per cent with immediate effect.

Bank Rate


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45. The Bank Rate has been retained at 6.0 per cent.

Cash Reserve Ratio46. The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their netdemand and time liabilities (NDTL).

Guidance47. The projected inflation trajectory indicates that the inflation rate will begin falling in December2011 (January 2012 release) and then continue down a steady path to 7 per cent by March 2012. Itis expected to moderate further in the first half of 2012-13. This reflects a combination ofcommodity price movements and the cumulative impact of monetary tightening. Further,moderating inflation rates are likely to impact expectations favourably. These expected outcomesprovide some room for monetary policy to address growth risks in the short run. With this in mind,notwithstanding current rates of inflation persisting till November (December release), thelikelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if theinflation trajectory conforms to projections, further rate hikes may not be warranted. However, as

always, actions will depend on evolving macroeconomic conditions.

48. It must be emphasised, however, that several factors - structural imbalances in agriculture,infrastructure capacity bottlenecks, distorted administered prices of several key commodities andthe pace of fiscal consolidation - combine to keep medium-term inflation risks in the economyhigh. These risks can only be mitigated by concerted policy actions on several fronts. In theabsence of progress on these, over the medium term, the monetary policy stance will have to takeinto account the risks of inflation surging in response to even a moderate growth recovery.

Expected Outcomes

49. These actions and the guidance that is given are expected to:Continue to anchor medium-term inflation expectations on the basis of a credible commitment tolow and stable inflation.Reinforce the emerging trajectory of inflation, which is expected to begin to decline in December2011.Mid-Quarter Review of Monetary Policy 2011-12

50. The next mid-quarter review of Monetary Policy for 2011-12 will be announced through apress release on December 16, 2011.

Third Quarter Review of Monetary Policy 2011-12

51. The Third Quarter Review of Monetary Policy for 2011-12 is scheduled for Tuesday, January24, 2012.

Questionnaire

Dear Respondent.


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I am Aman gupta the researcher of this project studying in MBA IV SEM. MAIET Jaipur. Forfulfillment of my Degree of MBA I have take MARKETING OF SPECIALIZED PHARMAPRODUCTS. As you are the people of Medical Fraternity, you are more knowledgeable than

common people in this field, for that I need very few seconds along with your valuable opinion onthe above Questionnaire. (Tick appropriate option of your choice Or please write in other

specifically on your mark) I promise your information remain confidential and use only for myproject purpose.

Thanking you

Yours Faithfully

Mr. Aman Gupta

Researcher

Dr. Name:-


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Dr. Address:-

Ph No.:-

1) How do you come to know medicines of pharmaceutical company?

Through MR

Through Advertisement

Through index book

Other source

2) How do you remember the brand names of medicines, as then are so many players in

market?

Conference participation of companies

Due to visual folder

Gifts given by MR

Literature send by companies

Continuous Fallow up

AnyOther

3) How do you purchase specialized pharma products?

By brand name

By generic Name

By contents

4) What do you do when chemist substitute your prescribed product?

Not accept at any conditions


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Accept if product not available

Accept some time

Accept always

5) Which brands are easy to recall?

Brand representing molecule

Brand easy to pronounce and reminder

Brand representing companies name

Brand unique and different from companies name

6) What impact does visual folder play in Brand reminding?

Very Important

Important

Average

Not much

What are the parameters you consider products before purchasing?

Company's reputations

Relation with MR

Quality of products

Availability of the products


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Documents

Monetary Policy 2011