MACROECONOMIC TARGETING

Presented byAmit Kumar Morya Roll No. 49 MBA-IB 2006-2008

Structure of the presentation Overview Demand for money Transmission Mechanism Monetary Control Instruments Issues in Monetary Policy Monetary Policy in India Objective Monetary Control in India Exchange Rate Objective Exchange Rates in India Monetary Policy and Fiscal

Policy

Interaction between MP and FP Indian Case

Demand for Money

Transmission Mechanism

Financial Variables-Interest Rate

Financial VariablesExchange Rate

Financial Variables-Asset Values

Monetary Control Instruments

Open Market Operations

Issues in Monetary Policy

Monetary Policy In India

Monetary Control in IndiaOpen Market Operations

Helped in regulating the flow of bank credit to the private sector.

Monetary Control in IndiaOpen Market Operations

Source: RBI, Annual Report 2005-06

Monetary Control in IndiaBank Rate and Discretionary Control of Refinance

Source: RBI, Annual Report 2005-06

Monetary Control in IndiaCash Reserve Ratio

Monetary Control in IndiaStatuary Liquidity Ratio

Monetary Control in IndiaStatuary Liquidity Ratio

Source: RBI, Annual Report 2005-06

Monetary Control in IndiaLiquidity Adjustment Facility

Monetary Control in IndiaLiquidity Adjustment FacilityInterest Rate Corridor

Call money rate and other money market rates respond to both high and low repo rates

Monetary Control in IndiaLiquidity Adjustment Facility

Source: RBI, Annual Report 2005-06

Exchange Rate

Exchange RateRomer (1999)

Exchange Rates in India

Exchange Rates in IndiaForeign Exchange Reserve

Source: RBI, Annual Report 2005-06

Rupee under upward pressure

Exchange Rates in IndiaThree options before RBI

Exchange Rates in IndiaRBI's Purchase and Sale of Dollars60 50 40 US $(Billion) 30 20 10 0 1996- 1997- 1998- 1999- 2000- 2001- 2002- 200397 98 99 00 01 02 03 04 YearExchange Rate(RS/$)aa 60 50 40 30 20 10 019 93 19 -9 4 94 19 -95 95 19 -9 6 96 19 -9 7 97 19 -9 8 98 19 -9 9 99 20 -00 00 20 -0 1 01 20 -02 02 20 -0 3 03 -0 4

RBI's Purchase of US $(billion) RBI's Sale of US $(billion)

Source: Macroeconomic Policy Environment, An Analytical Guide for ManagersMovements in Exchange Rate7 Coefficient of Variationiii 6 5 4 3 2 1 0

Average Exchange Rate Coefficient of Variation

Interaction between Monetary and Fiscal in the Policy 1. To determine O/P and Interest rateshort run IS-LM Curve

IS-MP Curve (Romer 2000)

Interaction between Monetary on different sectors and Fiscal Policy 2. Uneven effect

3. Functioning of Government expenditure

Monetary and Fiscal Policy - Indian Case

Monetary and Fiscal Policy - Indian Case: After Reform

Need to be target

Thank YouReferences

Shyamal Roy, 2005. Chapter 5: Monetary Policy. Macroeconomic Policy Environment, An Analytical Guide for Managers. Shyamal Roy, 2005. Chapter 6: The External Sector. Macroeconomic Policy Environment, An Analytical Guide for Managers. Rakesh Mohan, 2005. Financial Sector Reforms and Monetary Policy: The Indian Experience Raghbendra Jha, Dec 2005. Inflation Targeting in India: Issues and Prospects. CAMA Working Paper Series. Ashima Goyal. Coordinating Monetary and Fiscal Policies, India Development Report, 2002. LM Bhole, 2004. Chapter 6: Reserve Bank of India, Financial Intuitions and Markets. Major Monetary Policy Measures- Bank Rate, CRR, and SLR. Available at: http://ww.rbi.org.in Fiscal Situation 2006-07. Available at: http://ww.rbi.org.in Himanshu Joshi, The Interbank Money Market in India: Evidence on Volatility, Efficacy of Regulatory Initiatives and Implications for Interest Rate Targeting Trends in Banking 2005-2006, RBI Report. Available at: http://ww.rbi.org.in K Seethapathi and Arindam Banerjee, Interest Rates in India: What Lies Ahead? Treasury Management, IFCAI Press 2006.

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