Essay Monetary Policy

2054 Words 9 Pages
September 2013

CRISIL MonetaryPolicyReview
RBI: Restricting Ballooning Inflation
Figure 1:Average daily borrowings of banks from the RBI
Rs. Billion 2500 2000 1500 Borrowings of the banking system

Figure 2: Inflation: Up and rising

%, y-o-y 12.0 10.0 8.0 Consumer price inflation

1000

6.0
500
09/16/2013

0

4.0

Wholesale price inflation

07/02/13

07/13/13

07/24/13

08/04/13

08/15/13

08/26/13

09/06/13

2.0

Nov-12

Dec-12

Jan-12

Jun-12

Oct-12

Jan-13

Feb-12

May-12

Jun-13

Feb-13

May-13

Mar-12

Aug-12

Mar-13

Apr-12

Jul-13

Jul-12

Net LAF

MSF

Note: LAF – Liquidity adjustment facility, M SF – M arginal standing facility Source: RBI, M inistry
…show more content…
If this pattern continues, the weighted average of the borrowing costs of the banks will go down by nearly 40 bps, with the repo now at 7.5 per cent and MSF at 9.5 per cent. Interest rates had risen since the second half of July when the RBI raised the MSF rate by 200 bps to 10.25 per cent and placed a cap (0.5 per cent of net demand and time liabilities) on borrowings at the repo rate. With these measures, banks were required to borrow at the MSF rate to meet a large part of their daily funding needs (Figure 1). Consequently, other short-term rates also moved up. RBI’s focus on inflation should be seen in the context of high CPI and rising WPI. Although core inflation is falling right now, the momentum indicators (3-month SAAR of non-food manufacturing inflation) indicate a possible rise in core inflation in months to come. Loosening of monetary policy to support growth, therefore, runs the risk of creating a situation of high generalised inflation as supply shocks from fuel can feed into core inflation. RBI has signalled this through the repo rate hike. So, expect interest rates to remain firm through 2013-14.

Aug-13

Sep-12

Apr-13

1

CRISIL MonetaryPolicyReview
Loan offtake to remain sluggish in 2013-14 Credit growth in the banking sector, which was subdued at 13-14 per cent till mid-July, has been steadily rising over the last three fortnights. Banking

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