Monetary policy

& inflation in
india
Group 11
 timeline

1915-1963 1964-1991 1992-2008 2008-Current

Pre-Independence Period of High Post- Reform Period Recent Period
& Initial Formative Intervention & New
Years Regime
 Pre-Independence era
Setting up of a Central Bank
(pre 1947)

Chamberlain commission
proposing amalgation of Young
3 presidency banks Commission
appointed

1773 1915 1921 1925 1934

First attempt RBI established as a

to set up a Imperial Bank came
into existence but Central Bank and Imperial
central Bank Bank took the role of a
acted as a pseudo-
central bank commercial Bank

Primary Objectives of RBI in this Era

ISSUING of notes Public debt Maintaining exchange value of
 Initial formative period (1947-1963)
Coming up of Planning Commission

Planning Commission, set up in 1950, entrusted with actions &

responsibilities pertaining to the economic policy of India Five year plans

Percentage Increase
1st Five Year Plan 2nd Five Year 3rd Five year plan 60.00%
Plan
Restrictive Monetary Policy Exorbitant increase Rise in government spending owing 50.00%
in prices to hostilities with China
40.00%
Selective credit
Controlled government expenditures policy followed Need for credit discipline
30.00%

1st Five Year Plan 2nd Five Year Plan 3rd Five Year Plan 20.00%
13% 10%
15%
20% 20%
6% 10.00%
31% Agriculture

24% Transport &

Communications 0.00%
23% Growth in money supply Increase in prices Increase in Real Income
Social Service
23% 25% 1951-1956 1956-1961 1961-1966
28% Industries and Minerals

18% Power
17%
27%

To conclude this Era

SUCCESS & ROLe of other CREDIT DISCIPLINE required
 timeline

1915-1963 1964-1991 1992-2008 2008-Current

Pre-Independence Period of High Post- Reform Period Recent Period
& Initial Formative Intervention & New
Years Regime
 1964-1984
“Credit Planning period”

INFLATION

28.52%

16.79%

13.27% 13.13% 13.11%

11.38% 11.83%
10.77%
9.65%
8.31% 7.93% 8.43%
6.43% 6.62% 6.23%
5.09%
3.36% 3.07% 2.54%
-0.56%
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

-7.57%
 1960s

Heavy Reliance on • Export subsidies, import tariffs & restrictions, restrictions on currency
Key Characteristics

trading and convertibility

• High inflation meant price of Indian goods were higher than foreign
imports goods
• More incentive for imports than exports

• Did not have the option of borrowing from Private Sector due to the
BOP Deficit negative savings of that sector
• Government had to issue bonds to the Reserve Bank of India
• Increased money supply, in the long term led to further inflation.

• Foreign aid was cut off in 1966 owing to the conservative non liberal
Currency Devaluation monetary policies.
• Deficit War Funding
• High Inflation
• Drought of 1964-65: Supply Side Deficiencies
 1970s
1968

Inflation Control after Devaluation

1971 1% High Inflation
• Monetary Expansionary policies
• Debt Funding of 1971 war & funding through note printing
3% • First Oil Crisis: OPEC slashing prices
Hyper Inflation
• Monetary Expansionary policies
1974 28.5% •
•
Debt Funding of 1971 war & excessive note printing
First Oil Crisis: OPEC slashing prices
• Droughts
Deflation
-7% • Emergency: Price Control even though rising costs
• Prices fell corresponding to previous year
• Stagflation in the west
1975-76
8.3 Price Control in face of Inflation
• High Unemployment

% • Economy stagnation

1977
 1985-1991
Monetary policy and inflation

The monetary policy during these periods thus has to neutralize the inflationary impact by raising CRR

This move to increase foreign currency reserves led to control on domestic currency supply.

The monetary policy was slowly moving towards increasing money supply in the market. This led to a change in the type of
inflation from Cost-push Inflation to Demand-pull inflation
 Discount and Money market
EXPORTS OGL finance house
Delicensing instruments Treasury Bills
of India

Half of the exports The number of Development of Industrial Controls The range of the The auctioning of
profits were made capital goods items the Indian money were relaxed. 1985 money market 182-day Treasury
income tax included in the OGL market such as saw Delicensing instruments was Bills was also
deductible and the list expanded setting up of getting a major also widened by initiated in
interest rate on steadily reaching Discount and boost with 25 the introduction of November 1986
credit for export 1,007 in April 1987, Finance House of industries being CDs (1988), CPs
narrowed from 12 1,170 in April 1988, India (DFHI) in 1988 delicensed (1990) and inter-
to 9 percent and 1,329 in April to make money bank participation
1990 market more liquid certificates (1988).
 timeline

1915-1963 1964-1991 1992-2008 2008-Current

Pre-Independence Period of High Post- Reform Period Recent Period
& Initial Formative Intervention & New
Years Regime
Inflation during 1991-2008
Major Trends

Monetary Policy
The tools used under monetary policy have matured:
• CRR/SLR used in 70s/80s
• Independently set Interest Rates by Commercial Banks
• Inflation rates in control despite high growth rates

New Economic Policy

• Greater Links with global economy would cause wider fluctuations
• However, Inflation down from the previous exorbitant level.
• Slight increases as growth set in motion

Effect of Global Sanctions

• Peak inflation not controlled by Monetary policy
• US and World sanctions for Pokharan Nuclear Testing

Expedited Growth Period

• Inflation increased from 4-8%
• The 2008 financial crisis led to brief decline
Impact of Inflation
Major Trends

Unemployment
• There is indeed a trade off between inflation
control and unemployment.
• Greater responsibility on RBI after autonomy
increased in 1991.
• Current bone of contention between
government and RBI on employment only.
• RBI has chosen a hawkish inflation policy.
• Relation explained through the Philips Curve.
This curve has been holding good in the Indian
Case.
 Dollar vs. Rupee
80

70

60

50

40
Price

30

20

10

0
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 18
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ct,
,O
10

Year

Rupee against Dollar

The rupee has been depreciating against dollar at an expedited
rate since 1991, giving rise to inflationary pressures and RBI
managing that through a Managed Float.
 timeline

1915-1963 1964-1991 1992-2008 2008-Current

Pre-Independence Period of High Post- Reform Period Recent Period
& Initial Formative Intervention & New
Years Regime
 2006-2013 Rising Interest rates
• Rising Inflation Rate from 5% to around 7%
• Increase in real money
• Large capital inflows
• Hardening interest rates – Repo rates rise
from 6.5% to 7.75%

2006-07

Financial
• Double digit inflation
• CRISIS
High Crude oil rates
RBI’s •
•
Indian Rupee falls as FIIs pull money
Liquidity crunch
• High Inflation touching 9-10%
DileMma
• Dull Investments •
•
CRR reduced from 9 to 5
Repo rates reduced from 9% to 4.75%
• GDP growth rate of 5%
• No fresh foreign investments

2011-13 2008-10
 2013-
18
INFLATION
2013-16
•
• PRIMARY
Repo rates increased toTARGET
RBI converts to inflation targeting central bank
7.5% even as country
faces sluggish growth
• Inflation falls to 4.5% in 2016
• GDP growth rate of 7% achieved in 2016
• Hardening interest rates – Repo rates rise
NEW POLICIES from 6.5% to 7.75%
• Licenses to payments bank to increase reach
Regression Analysis of banking services
• Foreign investment limit in central
government securities increase to 5% and 2%
in state government bonds

Non Performing
•
ASSETS
Indian banks NPAs revealed to be one of the
NPA highest in the world
• RBI lists 120 accounts as NPAs in late 2015
• 14% of bank’s assets classified stressed
• 85% of hard currency made illegal • Resolution processes and losses on financial
• New notes issued statements lead to clean up
• Credibility takes hit due to demonetization
•
•
CRR and Repo rates remain the same
Regression analysis shows a coefficient of 0.6. DEMONETIZATION
•
•
Monetary policy explains this significant portion of inflation.
However, this coefficient higher in other countries.
•
• & GST
85% of hard currency made illegal
New notes issued
• Credibility takes hit due to demonetization
2016-17
• Other factors as discussed through India’s history. • CRR and Repo rates remain the same
Thank You!