RBI: History of the Monetary Policy in India and what happened today

As widely expected, the central bank maintained a status quo on the key policy rates but chose to cut the statutory liquidity ratio (SLR) by 50 basis points to 22 percent

August 05, 2014 5:14 IST | India Infoline News Service

Dr. Raghuram Rajan, Governor at the Reserve Bank of India (RBI), who took over as the chief, last year, amid economic crises, presented the third bi-monthly monetary policy statement today. As widely expected, the central bank maintained a status quo on the key policy rates but chose to cut the statutory liquidity ratio (SLR) by 50 basis points to 22 percent. The proportion of SLR securities that are allowed to be held-to- maturity by banks have also been brought down by 50 basis points to 24 percent of a bank's net demand and time liabilities (NDTL).

Let us have a look at some of the finer points from today’s policy:

  1. This high-profile RBI Governor addressed the media for nearly 35 minutes.
  2. Rajan, who is well known for his strong credentials, and a winsome personality, was optimistic of bringing down inflation to the 8% mark. The Governor stated nearly thrice in his discussion that “8% inflation goal is within our reach”. His voice rose a little, every time he made this statement. However, he also emphasized on the fact that the upside risks like uncertainty over monsoon conditions, higher oil prices and rupee movement exists, although overall risks are more balanced than in June.
  3. Rajan confidently said that the RBI will continue to monitor inflationary developments closely and remain committed to the disinflationary path of taking inflation to 8% by January 2015 and 6% by January 2016.
  4. Rajan was also confident that he SLR cut will help the government to manage its financials better and will help banks to lend more to the productive sector. The Governor will also not hold rates longer than necessary.
  5. Some of the other key areas that Rajan touched upon included growth, exports, gold imports, currency, current account deficit, reserves, liquidity management, besides inflation.  
  6. Rajan welcomed S.S Mundra to the RBI team. S.S Mundra, who served as the Chairman and Managing Director at Bank of Baroda, is now the deputy governor at RBI.
  7. Stock markets reacted sharply to the announcements. Once the policy statement was declared, markets tumbled. However, once Rajan started his discussion with the media, it recovered.
  8. Rajan’s background is impeccable and quite praiseworthy. Aged 51, the Tamilian from Bhopal who holds degrees from the prestigious IIT and IIM, and a Ph.D from the Massachusetts Institute of Technology, is among the youngest RBI Governors. He was the chief economist at the International Monetary Fund between 2003 and 2006. Rajan has been successful in stabilizing the Indian rupee by announcing series of fire-fighting measures, just after he took over. This high-profile RBI Governor has his agenda clear.

History of the Monetary Policy in India

Monetary policy is the process by which the monetary authority of a country, generally the central bank controls the supply of money in the economy, by exercising its control over interest rates and other instruments, in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the RBI, who maintains price stability in the economy.

The RBI or the central bank of India was established in 1935. The RBI formulates and implements the government’s monetary policy, issues bank notes and coins, manages the country’s international payments and its foreign-exchange market, acts as an investment bank for the central and state governments, and maintains the accounts of, and extends credit to, commercial banks.

A central board of directors headed by a governor oversees the bank. In addition, four local boards, headquartered in Mumbai, Kolkata, Chennai, and New Delhi, advise the central board on regional issues and represent the interests of regional banks. All members of the central and local boards are appointed by the government for terms of four years.

The first Governor of the central bank was Sir Osborne Smith, appointed by the British. He was succeeded by another Britisher and Indian Civil Services officer, Sir James Braid Taylor in 1937, after which C D Deshmukh took over.

Read about the RBI Governors of India

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