Rbi Intervention

RBI INTERVENTION RBI INTERVENTION

Group 9BGroup 9B

ByBy

Lakshmi Priya .A (07927817)Lakshmi Priya .A (07927817)

Mohit Bansal(07927952Mohit Bansal(07927952))

04/08/23 1Against RBI Interventions

OutlineOutline

IntroductionIntroduction Current RatesCurrent Rates How does the RBI interfereHow does the RBI interfere What the RBI is trying to control What the RBI is trying to control Methods of interventionMethods of intervention Effects of interventionEffects of intervention ConclusionConclusion

INTRODUCTIONINTRODUCTION

Monetary policy - Management of Monetary policy - Management of money supply and interest rates by money supply and interest rates by central banks to influence prices and central banks to influence prices and employment employment

Expansion or contraction of Expansion or contraction of investment and consumption investment and consumption expenditure.expenditure.

Current policy ratesCurrent policy rates Bank rate: 6Bank rate: 6 Repo 7.75Repo 7.75 Reverse repo : 6Reverse repo : 6Reserve ratiosReserve ratios CRR: 7CRR: 7 SLR: 25SLR: 25Lending/deposit ratesLending/deposit rates PLR: 12.75-13.25PLR: 12.75-13.25 Savings bank rate:3.5Savings bank rate:3.5 Deposit rate: 7.5-9.6%Deposit rate: 7.5-9.6%

What RBI is trying to What RBI is trying to Control?Control?

Open capital accountOpen capital account Pegged currency regimePegged currency regime Independent monetary policyIndependent monetary policy

Impossible TrinityImpossible Trinity


Confused states of the Confused states of the TrinityTrinity

Inflation Rises - Inflation Rises - Contractionary Policy Contractionary Policy

: To Decrease Money Supply : To Decrease Money Supply Interest rates will go up . Interest rates will go up . Open COpen Capital account : Money from apital account : Money from

Abroad.Abroad. Pressure on the rupee to appreciate.Pressure on the rupee to appreciate. Central Bank buys up the dollars leading Central Bank buys up the dollars leading

toto

Increased Money Supply.Increased Money Supply.


Another State of Another State of confusionconfusion

US hikes the Fed rate US hikes the Fed rate Capital will flow out :Currency will Capital will flow out :Currency will

depreciate.depreciate. RBI to prevent depreciation: sell dollars RBI to prevent depreciation: sell dollars

or raise rates.or raise rates. Currency pegging forces RBI to also Currency pegging forces RBI to also

raise rates.raise rates. Peg means following US monetary policyPeg means following US monetary policy

Autonomous Monetary Policy?Autonomous Monetary Policy?


RBI’s Attempt to dodge this RBI’s Attempt to dodge this TrinityTrinity

Sterilised Intervention:Sterilised Intervention: selling of selling of bondsbonds

Constraints to sterilisationConstraints to sterilisation Run out of bondsRun out of bonds Mounting fiscal costsMounting fiscal costs The rates go up and this sucks in The rates go up and this sucks in

more capital flowsmore capital flows Short term solutionsShort term solutions


Efficient SterilizationEfficient Sterilization


Inefficient SterilisationInefficient Sterilisation


RBI ran out of stocks of government bonds in May 2004, at the end of 2004.

M0 is smaller than NFA(!). Monetary Stabilisation Bonds were started – but

explicit fiscal cost; no longer the hidden costs of pegging. Forex intervention continued - endeavour to get

exchange rate back under control. Greater globalisation

requires bigger market manipulation - e.g. $12 billion in February 2007 alone.

Only partly sterilised.

CRRCRR

Increase of CRR of nearly 1% in 10 Increase of CRR of nearly 1% in 10 monthsmonths

Used to reduce liquidity in the Used to reduce liquidity in the systemsystem

Reduces the money available for Reduces the money available for credit .credit .

Turbulence in the call money Turbulence in the call money markets due to sudden hikes in CRR markets due to sudden hikes in CRR

Repo rate : RBI lends money to banks – how the RBI Repo rate : RBI lends money to banks – how the RBI influences interest rates . influences interest rates .

Reverse Repo rate : RBI pays to banks for their Reverse Repo rate : RBI pays to banks for their excess funds with RBI in form of Govt Securitiesexcess funds with RBI in form of Govt Securities-RBI increases R R wants to reduce liquidity.-RBI increases R R wants to reduce liquidity.-Financial markets tighten and there is an increase in -Financial markets tighten and there is an increase in yields of securities. Banks tie interest rates to these yields of securities. Banks tie interest rates to these yields.yields.- Increase in lending and deposit rates.Less spending- Increase in lending and deposit rates.Less spending

Bank Rate : rate at which RBI borrows from the bankBank Rate : rate at which RBI borrows from the bank

Increase in Reverse Repo Increase in Reverse Repo from 01-06from 01-06

Effects of RBI Effects of RBI InterventionIntervention

Volatility in Exchange Rates Volatility in Exchange Rates


Growth in Forex ReservesGrowth in Forex Reserves

In 2006-07 reserve money growth rose to 23%In 2006-07 reserve money growth rose to 23%Massive Reserve build up which has not been Massive Reserve build up which has not been efficiently sterilised (266.5 billion USD)efficiently sterilised (266.5 billion USD)

Effects of RBI Effects of RBI Intervention cont..Intervention cont..

Rise in InflationRise in Inflation - - From April 2006 From April 2006 to January 2007 to January 2007 RBI purchased USD RBI purchased USD 12.6 billion (Rs.56, 543.05 crores ).To 12.6 billion (Rs.56, 543.05 crores ).To reduce liquidity raised interest rates reduce liquidity raised interest rates

Tightening of credit Tightening of credit - - rise in repo rates rise in repo rates , a rise in cash reserve ratio and a reduction , a rise in cash reserve ratio and a reduction in rate of interest on cash deposited by in rate of interest on cash deposited by banks with RBI. Raise lending rates and banks with RBI. Raise lending rates and reduce the amount of credit disbursed reduce the amount of credit disbursed


Lesser growth in the economy - Lesser growth in the economy - Reduced the level of investment Reduced the level of investment activity in the economy, activity in the economy, ( infrastructure sector) , small and ( infrastructure sector) , small and medium entrepreneurs ,Housingmedium entrepreneurs ,Housing

Suddenness of the rupee movementSuddenness of the rupee movement

Inflationary pressureInflationary pressure

Exports growth is reduced Exports growth is reduced due to appreciating rupee due to appreciating rupee

Erroneous belief -Growth is not affected.Erroneous belief -Growth is not affected. Exports will become less competitive due Exports will become less competitive due

to inflation if RBI buys dollars to keep to inflation if RBI buys dollars to keep the rupee from appreciating.This will the rupee from appreciating.This will reduce the growth in exportsreduce the growth in exports

REER Real Effective exchange rate - REER Real Effective exchange rate - Nominal exchange rate minus inflation. Nominal exchange rate minus inflation. Higher inflation mops up the competitive Higher inflation mops up the competitive advantage of a weaker rupee advantage of a weaker rupee

ConclusionConclusion Support to Exporters – Provide Platforms Support to Exporters – Provide Platforms

like improving infrastructure, changing like improving infrastructure, changing Labour Laws , hedging mechanismsLabour Laws , hedging mechanisms..

Transparency – Long Term policies Transparency – Long Term policies Dincer & Eichengreen, 2007: On a scale of 0 to 15, RBI stagnated at 2 from 1998 to 2005. Asian average rose from 3 to 5.1.


Monetary policy announcements Monetary policy announcements need to be made on preset dates need to be made on preset dates

When faced with the impossible trinity, all mature market economies of the world have chosen: floating exchange rate + autonomous monetary policy + open capital account.

THANK YOU !THANK YOU !

Economy & Finance

Rbi Intervention