RBI Monetary policy.

RBI lowered the bank rate by a margin of 25 base points after 3rd Bi monthly Monetary Policy Committee meeting on 2nd August, 2017. Out of total 6 Monetary Policy Committee {MPC} members, 5 voted for the rate cut. Given the way in which inflation rate has been at the historic low. Many global factors were taken into consideration before doing this.

RBI has made a mandate of maintaining the inflation rate in range of 4% {+
2% or  -2%} with insisting in on maintaining good  growth level in the economy . There had been many assessments which were done before taking this step.

Prominent economies like US and Euro zone have shown better growth figures. In these economies unemployment has been declining, inflation has been declining and the private consumption has been rising. There had been some concerns shared about the situation of Chinese economy slowness, but that also seems to be regaining its growth trajectory.

Better consumer demand has actually resulted into expanded trade volumes globally and thus causing enhancement in export and import figures in prominent economies.

Also was an interesting surge seen in US equities markets, as well as financial markets in Asian economies, while some slowness was noticed in European economies due to factors like Brexit and possible aftermath of British exit from union.

Indian economy is largely dependent upon the South eastern monsoons and a normal monsoon enhances the well being of agriculture sector. It has been pretty good so far this year. Inflation rate had been declining and was gradually registered in lower figures. India which imports crude oil heavily from outside also benefitted from decline in the international oil and crude prices.

 

Overall assessment by RBI officials indicated that inflation will be on lower side for the second half of the year also. Many factors like new regulation acts in real estate {RERA, Real estate regulation Act,}, manufacturing activities, and impact of loan waivers to farmers were taken into consideration.

MPC observed that there needs to be enhancement in private expenditure and investment, betterment of infrastructure and easing of regulation is necessary for speedy conduct of projects. The concerns about recapitalization of PSUs have been widely discussed.

Next meet of MPC will be held in October, 2017.

 

Harsh Vardhan Pathak.

 

Attached is the RBI monetary policy press release link.

 

https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=41256

US Federal rate hike of March 2017.

Taken from our blog,”Brinks of economic thoughts”

US Federal rate hike of March 2017.

 

FOMC meet of US Federal Reserve came with much anticipated outcome this week, the expected rate hike to a range of .75-1 %.This benchmark interest rate hike of .25 % has only been the third over the past decade. The major reasons which enabled Fed to take this step was consistent fall in inflation and decline in unemployment figures to less than 5 %{ 4.7 % to be exact}.
Federal reserve policymakers are expected to increase the interest rates 3 times this year.US economy, which is one of most diversified financially driven economies of the world has seen significant changes while showing the solid progress in growth parameters. It has given indication that further rate hikes will be gradual.
Interestingly US economy affects all political and economic aspects of world. In Indian context if we make an assessment, this had been widely forecasted that US will continue to make rate hikes, one among which was done just 3 months ago. The major challenges which it posed to nearly all emerging economies were of heavy capital outflows and lower inflows.

As of now major central banks like US, UK, and ECB,have got the aim to contain the inflation mark below 2 %.Federal reserve officials were also in a position to make rate hike as of low unemployment rates over past consistent 40 + weeks.
One of the observation which were made by Janet Yellen,Governor of Fed in March 2015 was, if Fed wanted to ignore the tight labour market, inflation rate will easily surpass its 2 % assumed target. Situation at that moment will be where Fed will be forced to raise the rates sharply to bring the inflation to control, putting up the possibility on another recession, so increasing the unemployment rates. She insisted in her arguments that it will be better to increase the rates in advance.

This has many impacts on giant economies of Asia too. Although this is also expected that next Fed rate hike may be as earlier as June-July. Donald trump who has been very protectionist for US interest seems to be insisting on passing his ambitious plan of tax cuts, increased spending on infrastructure and more deregulation in markets. It becomes a cycle when ones stringent regulation are most sought which follows advocates of more and more flexibility in rules.
Immediate impact on the export driven economies is bound to be positive. Rates going up are actually an indication on the sound basics of economy and indeed it means that better performing companies from Asia will be able to sell of better in USA.In terms of pure economics, with strengthening of Dollar, Asian exports will be becoming more cheaper-so enhancing the growth rate of primarily export driven economies like China, Japan, S Korea. But if we assess the pressing upon purchasing and use of “buy American” as emphasised by Trump, then these giants may be at the receiving end too.
Chinese economy which has been facing pressures due to slowing growth ,weakening currency and compiling debt.BIS figures indicate that overall debt accumulation by China’s government ,corporate and household sectors have been a massive 26 tn $,as it stood in 2015,which easily makes it more than 250 % of GDP.A growth model which was unparalleled like China is also trying to make phased transition to an economy which is market driven, which depends more on consumer spending, rather than pumping cheap exports globally.
This had been getting forecasted as early as 2015, that rates will be hiked by 1 % or so. Janet Yallen when appointed as Fed Governor had a tough challenge .Any major event of US economy creates impact globally .Historically the unemployment rate have been at low and Fed seems keen to raise rates than to the ones who worry about low inflation. Financial markets are also booming.
Asia has to be now ready for prepared for an era where cheap money boosted stocks. With all indications of more expected rate hikes coming up, Fed moves will be watched ahead.

{Attached is the link of FOMC meet}

 

https://www.federalreserve.gov/newsevents/press/monetary/20170315a.htm

 

 

Harsh Vardhan Pathak

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

This has been used from our blog’Brinks of economic thoughts”

 

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

What is s central bank?

 

Central bank is central agency

It   stands at the centre of national banking system.

Played  a key role in in development of modern monetary system.

Mission of central bank?

Macroeconomic   stability.

Low and stable inflation  , increased growth and employment.

Financial  stability.

To ensure that nations financial system functions properly, avoids  and prevents financial panics.

 

Policy tools of central bank

 

Monetary policy.

Adjusting lever of  short  term interest rates, to influence spending, production, investment.

Provision  of liquidity.

For short term finance and ensuring that financial institutions do not collapse, they provide liquidity, thus acting as lender of last resort.

 

Financial regulation and supervision.

 

Central banks do ensure supervision, thus reducing loss of confidence of public and minimising financial panics.

Role during  crisis as lender of last resort in 2008 crisis.

Lessons from  great depression.

In a financial panic central bank need to lend freely to halt runs and restore functioning.

Highly accommodative financial policy helps support economic recovery and employment.

Global response was,

Prevent fallout of globally important financial institutions.

Work to normalise credit market.

Restore depositors  confidence.

Ensure financial institutions access to funds.

 

Federal reserve action.

 

Federal lends to bank through credit facility called discount window.

Maturity of discount loan was extended and interest rates reduced.

Regular  auctions of discount window funds was conducted to encourage participation of financial firms.

All loans were required to be secured by collaterals.

New programs allowed to provide liquidity to  financial  institutions and end illiquidity problems.

Purpose was to enhance stability of financial system.

Promote availability of funds to US business and house hold and thus ensure recovery

 

Institutions and markets covered by fed ‘s action of last resort.

 

Banks [through discount window]

Brokers –dealers[financial firms that deal in securities and derivatives]

Commercial paper borrowers

Money market funds

Asset backed securities markets

Federal reserve established special programme to repair functioning in CP market and restart flow of credit.

In march 2008,,fed had facilitated take over of failed broker-dealer, bear sterns by bank JP Morgan chase.

In oct 2008 fed intervened by takeover of largest insurance company AIG .o prevent its collapse,fed reserve loaned 85 bn $ using AIG assets as ciollaterals.rescue of AIG prevented even greater shocks to wodl economy.

Fed worked closely with regulatory bodies such as FDIC and SEC,

Coordinated with foreign nbanks by issuing foreign currency swaps.

Fed led the stress test in start of 2009 of 19 banks,which helped restoring investors confidence and allowed banks to raise private capital.

Followed conventional monetary policy during financial crisis.

Fed reduced federal funds rate from 5.25 to nearly  0.

Fed undertook large scale purchases of treasury government sponsored enterprises mortgage related securities.

Large scale assets purchases.[also known as quantitative easing]

 

Harsh vardhan pathak

 

Changes in monetary stance in last Decade

This has been taken from our blog,”Brinks of economic thoughts.”

Changes in monetary stance IN LAST DECADE

 

[This had been written when Raghuram Rajan was appointed the RBI governor.

Last year we saw many issues which came up during the time when he left the job at RBI.

Given a fact that he has had immense contribution to the economy and we as a student respect him with high regards.]

 

 

We know that central banks follow a policy of minimising inflation level,,,so wee did see many times in past 5 years,,that RBI did prefer hiking rates to control excess liquidity in the market,,sucking liquidity ,,thus making its efforts to contain inflation.

 

Even during when newly appointed governor of RBI  raguram rajan,,there was lots of hype that RBI may now prefer easing prime rates,,,but even he did prefer containing inflation as his prime target,,

 

The link between the real interest rate and nominal interest rate is provided by the famous Fisher equation which postulates that the nominal interest rate is the sum total of a real interest rate and expected inflation.5 One implication of this is that the nominal interest rates should move in tandem with inflation. In the real world, nominal interest rates may not change one for one with the inflation rate but the direction more often is similar. Countries with higher inflation tend to have higher nominal interest rates than countries with lower inflation. Accordingly, the nominal interest rates in advanced countries tend to be lower than in emerging market and developing countries.

 

  • A central bank can influence real interest rates through financial repression/reforms and lagged monetary policy response to inflation. Real interest rate is a real phenomenon, but it could change in the short-run depending on how monetary policy responds to inflation and inflation expectations.
  • For the determination of growth and investment at the macroeconomic level the real interest rate is more relevant, even though the nominal interest rate is important for investment planning at the firm level.

 

In the last 10-year period from 2003-04 to 2012-13, monetary policy response can be broadly categorised into four phases based on growth-inflation outcome and the rapidly changing monetary policy response:

 

Phase I of 5 years of 2003-08 of high growth but rising inflation concern towards the later part of the period when repo rate was raised from 6 per cent to 9 per cent and the cash reserve ratio (CRR) was raised from 4.5 per cent to 9 per cent.

 

  • Phase II of 2 years of 2008-10 following the global financial crisis when the repo rate was reduced from 9 per cent to 5.25 per cent and CRR was reduced from 9 per cent to 5.75 per cent.

 

  • Phase III of 2 years of 2010-12 of monetary tightening responding to rising inflation when policy rate was raised from 5.25 per cent to 8.5 per cent but CRR was reduced to 5.5 per cent.

 

Phase IV of over a year of monetary easing in 2012-13 and 2013-14 so far with the repo rate reduced to 7.25 per cent and CRR lowered to 4.0 per cent; though since mid-July 2013, the RBI has tightened the monetary and liquidity conditions without changing the policy repo rate and CRR to address exchange market volatility

 

Harsh Vardhan Pathak