1. Prologue
  2. Why RBI’s monetary policy fails to control inflation?
    1. Urjit Patel: reforms in monetary policy
    2. Rajan Reforms in Monetary policy
    3. Monetary Policy Trend 2013
  3. Monetary Policy trend Jan 2014 onwards
    1. Why Rajan decreased SLR?
    2. Rajan Wisdom during press conference
  4. RBI restructuring
    1. Existing departments
    2. Five clusters
    3. Chief Operating officer (COO)
    4. Staff Posting & promotion in clusters


Chapter 4: Prices and Monetary Management. FIVE subparts

  1. Inflation indexed bonds
  2. measures of money supply
  3. Monetary policy trends, RBI restructuring
  4. Indexes’ Theory: WPI, CPI, IIP, Services index and others
  5. Indexes’ Current: Survey observations on WPI, CPI & IIP, How to combat inflation

Why RBI’s monetary policy fails to control inflation?

As per Economic Survey all of the following are responsible:

  1. government borrowings
  2. financial repression (e.g Government compelling public sector banks to invest money in G-sec beyond their SLR requirement)
  3. High level of non-performing assets (NPAs)
  4. high inflation
  5. informal finance / moneylenders.
  6. Rigidity  in reprising for fixed deposits

Urjit Patel: reforms in monetary policy

Refer to the mile-long separate article, published earlier. Click me

Gist of Urjit Patel’s recommendations:
RBI Target inflation
  • RBI should try to control inflation within 4% CPI (Combined).
  • With 2% (+/-) band = control inflation within 2 to 6% of CPI (Combined.)
RBI fix Accountability
  • Setup a monetary policy Committee to decide the monetary policy.
  • Appoint 2 outsider members, fix Accountability.
Govt.side reforms Restructure MNREGA like bogus schemes & subsidies, reduce fiscal deficit.

Rajan Reforms in Monetary policy

Before After Rajanbhai’s entry
Monetary policy was designed using “multiple-indicator” method.And within that RBI focused on WPI to measure inflation. From April 2014 onwards, Rajan decided to use CPI (Combined) as key measure of inflation- just like how Urjit Patel had recommended.
Monetary policy review was done every 45 days Every 60 days (2 months)**starting from April 2014

**You might wonder how is that a “reform”? Can’t we say Rajan is LAZY because he gives policy after 60 days instead of 45?

  • Ans. No. it takes time for RBI’s monetary policy to show impact on credit market. Just like medicines also take time to show impact on body.
  • Rajan felt that 45 days was too soon, if we wait for a few more days,  we get better picture of our previous policy’s impact and then new policy could be designed more effectively. Hence 2 months. Uriit Patel recommended the same.

Monetary Policy Trend 2013

As such RBI did not relax the repo rate but still they injected truckload of cash in the system:

Tool Money injected in the economy
OMO 52,000 cr.
MSF, LAF, Repo 91,800 cr
Total (2013-14) 1,43,800 cr. injected
  • Open market operations (OMO) i.e. purchase and sale of Government securities by RBI . In above table, we can see RBI would have paid ~52k crore to purchase G-sec from juntaa. (only then money will be injected- right!)
  • Liquidity adjustment facility (LAF) i.e. repo and reverse repo rate. (meant for all clients of RBI – banks, Non-banking financial institutions and both State and union Government)
  • Marginal standing facility – meant only for Scheduled commercial banks. BUT RBI had to put some restrictions on it to contain volatility in forex market, after rumor of Fed Tapering. (eg. For the given week, banks can’t borrow above 0.5% of their net time and demand liabilities)
  • beyond this, the trend of monetary policies from 2008 to 2013, is already discussed click me

Survey observes:

  • Inflation should  moderate during 2014-15
  • Then RBI will have freedom to ease the monetary policy i.e. reducing repo rate.

Monetary Policy trend Jan 2014 onwards

  • Let’s check policies From Jan.2014 onwards
Time BankRate MSF Repo ReverseRepo SLR CRR
Dec 2013 9 8.75 7.75 6.75 23 4
Jan 2014 9 9 8 7 23 4
  • Rajan raised repo rate because core WPI had increased.
  • But Rajan promised he won’t raise repo rate beyond 8%
  • After this he made no changes anywhere EXCEPT SLR in last two polices.

RBI Monetary policy rates Aug 2014

Bi-monthlyPolicy number 2014 BankRate MSF Repo ReverseRepo SLR CRR
first April 9 9 8 7 23 4
second June 9 9 8 7 22.5* 4
third August 9 9 8 7 22* 4
fourth Sept,30

*Why Rajan decreased SLR?

  • Decrease in statutory liquidity ratio = banks will have to invest less amount of money in Government securities (G-sec).
  • Result? They’ll have more money to loan in other productive sectors of economy.
  • Why did RBI permit this? Because Government promised “fiscal consolidation” =reducing fiscal deficit.
  • Meaning, Government will borrow less in future and since Government plans to borrow less (via G-sec) therefore Rajan decided to reduce SLR. Let the money be used for other sectors of economy.

Rajan Wisdom during press conference

My inflation targets are
Time CPI (Combined) Target
January 2015 8%
January 2016 6%

I’m worried that inflation will continue BECAUSE

  1. 60% chance of El-nino
  2. Geo-political problems in Middle east (Iraq-ISIS, Israel-Palestine) and their negative impact on crude oil prices
  3. IF Government INCREASES the MSP and fuel-fertilizer subsidies (for votebank politics)
My projections about GDP and CAD Are
GDP  growth %
2013-14 Below 5%
2014-15 5-6%

CAD projections: 2% of GDP

My reforms on Foreign portfolio investors

  • Won’t permit them to invest in Government treasury bills. (difference between G-Sec and T-Bill is that T-bill has less than 1 year maturity. G-sec more than 1 year…upto 20-30 years)
  • I’ll simplify KYC norms for Foreign Portfolio Investors. (more on FDI, FII classification when we see ch.6 and 7 of survey)

Financial inclusion and customer relations

  • Will expand the mobile banking network and Banking Correspondent (BC) network.
  • Will simplify KYC norms.
  • To reduce bank NPA, I’ll make a comprehensive framework.
  • Banks should not levy penal charges for non-maintenance of minimum balance in ordinary savings bank account and inoperative accounts, but instead curtail the services accorded those accounts until the balance is restored.
My reforms in forex market
Before after
Liberalised Remittance Scheme (LRS) quota: $75,000 per year $1,25,000
Only Indians can take currency notes upto Rs.10,000 outside India.Non-residents visiting India are not permitted to take out any Indian currency notes while leaving the country.
  • Increased this quota to Rs.25,000.
  • Even NRIs and foreign residents allowed to take away this much currency from India.
  • BUT Bangladesih and Pakistanis not allowed.

We’ll see more on exchange rates during survey ch6 and 7.

RBI restructuring

RBI restructuring plan

Important for interviews, especially RBI grade “B”.

Timeline RBI restructuring plan
2013, November RBI’s senior officials proposed re-structure plan.
2014, August RBI’s board approved the structuring plan.

Existing departments

At present, RBI is made up of following departments

  • HRM
  • Banking Operations
  • Financial Markets
  • Payment and Settlement Systems
  • Banking Supervision
  • Currency Management
  • Secretary’s Department
  • Internal Debt Management
  • Expenditure and Budgetary Control
  • Monetary Policy
  • Government and Bank Accounts
  • Non-Banking Supervision
  • Rural Planning and Credit
  • Statistics and Information Management
  • Economic & Policy Research
  • Inspection
  • External Investments and Operations
  • Information Technology
  • Foreign Exchange
  • Premises
  • Customer Service Department
  • Legal Department
  • Financial Stability Unit
  • Rajbhasha Department
  • Risk Monitoring Department
  • Department of Communication

Five clusters

Under Rajan’s restructuring Formula, All of above departments will be grouped into five clusters.

Cluster Head of the cluster
Monetary policy Dy Governor
Regulatory Dy Governor
Supervision Dy Governor
Financial market & infra. Dy Governor
Services: HRM, Expenditure, Budget control Chief Operating Officer (COO)*

This will help in better work division and coordination between various departments

Chief Operating officer (COO)

  • He’ll head the “Services” cluster- dealing with Human resources management, RBI’s own Expenditure and budget.
  • COO will be an an official of Deputy governor rank.
  • Problem: In the present RBI Act, only 4 Dy.governors can be appointed by Government of India.
  • So, Act has to be amended, to add fifth Dy. Governor and give him COO posting.

Staff Posting & promotion in clusters

  • At present ~17,000 employees in RBI
  • Under Rajan formula, an employee can be transferred only among the departments within same cluster.
  • Rajan will let the employees to pick their cluster-  after assessing their CSAT aptitude.
  • But Staff union is apprehensive about their posting-promotion opportunities under the new cluster plan.
  • At present, 2 out 4 Dy.Governor posts are reserved for RBI officers. Union fears that if 5 Dy.Governors, Rajan will give fifth job to “outsiders” like Nachiket Mor, instead of giving the promotion to any career-officer.
  • Union also fears Rajan’s plan for hiring “outsiders” as Chief general manager- Again less promotion chances for the career-officers (recruited through Grade “B” officers’ exam).
  • Rajan trying to build consensus by holding video conferences with them.