Monetary policy, Inflation targeting & RBI

• CPI includes - housing, edu , medical care, recreation
• WPI include -intermediaries goods -  mineral, basic metal, machinery 
• influenced by global  
• not directly consumed by HH

Monetary policy transmission

• Money supply, Interest rate
• Demand-side policy for obj - inflation consumption growth liquidity 
• Why Lag - 
• NPA, CRR, SLR, PSL, x Bond market, NBFC
• Impact - 
• inflation hurt marginalized
• -ve signal to investors Foreign & Domestic
• RBI mandate, 
• ineffective fiscal policy,
• uncertainty in the business cycle 
• credit rating of country 

• Janak raj com - MCLR trans - 
• uneven in categories, asymmetric over a monetary cycle 
• SBI linking saving/loan acc rate to Repo rate
• X administered interest rate govt saving scheme
• Ext Benchmark - LIBOR

Inflation targeting 

• Monetary Policy framework agree - medium-term CPI -4 +_2
• Started in mid half of 2016
• 2008-2013 high inflation ensured that India inflated away much of the incremental debt that was incurred to combat the effects of the global financial crisis in 2008 

• If Rbi overestimated inflation -> hawkish rate
• Reduce fiscal space for govt 
• Repo rate has minimal impact on Food, fuel prices - 50 % of cpi 
• (driven by global price, govt policy, subsidy, MSP)
• Impact Pvt invest, growth, consumption, employment 
• Not good for developing country like India , 
• even USA allowed Inflation Targeting with dual mandate (IT+ employment)  in 2012 mainly to control low inflation
• Ext factor not considered (oil, trade war, turmoil )

Way forward

• Int practice, ensure rbi independence 
• Urjit Patel recommended it 
• WF - India have structural CAD problem, poverty, growth imperative, single-pointed focus is not good enough 

Upfront capital infusion of 70, 000 cr in psb

RBI

• Risk Buffer level eralier pegged to 6.6 % now reduced to 5.5 %
• Rbi transfer surplus – that is, the excess of income over expenditure – to the government, in accordance with Reserve Bank of India Act, 1934:
• keeping in mind potential threats from financial shocks, and the need to ensure financial stability and provide confidence to the markets.
• From the central bank’s perspective, bigger reserves on its balance sheet is crucial to maintaining its autonomy.
• Malegam committee, 2013-14, the RBI’s transfer of surplus to the government as a percentage of gross income (less expenditure) shot up to 99.99% from 53.40% in 2012-13.
• global benchmarks, the RBI’s reserves are far in excess of prudential requirements.
• Arvind Subramanian - funds can be utilised to provide capital to government-owned banks.
• The quantum of surplus transfer has, however, not been a major factor in defining the central bank’s relationship with the government — “a settlement is reached with both sides showing some flexibility”, f
• CSR violation a civil offense not criminal
• MCLR linked loan, support of 20k crore to housing loan NBFC