At XM clients have direct access to the global forex trading market to trade over 50 forex pairs with leverage up totight spreads and no commissions. Urjit Patel Deputy Governor Monetary policy framework: how to strengthen it? Bank launched SBI eforex, an online forex rate booking platform unemployjent 18th June, Various Methods For Assessment Of Term Loan. In the course of action, there has been increase in number of no-frill accounts.
Then what is your solution? Meaning, although bank increased your money from Rs. Therefore, we must not focus on nominal interest rate i. Therefore, people prefer to invest in gold, instead of putting money in bank accounts. You can see Repo rate is lower than CPI. In the previous article on monetary policywe learned that Therefore, to fight inflation repo rate MUST be increased.
Urjit Patel recommends that Repo rate should be increased so much that its higher than CPI. If RBI frames monetary policy with primary objective of stabilizing the exchange rate, what will be the consequences? Hawkish trend: Why interest rates will rise? Immediately he setups three Committees: Chairman Occupation in RBI Topic Result Bimal Jalan Retire Governor New Bank licenses Work in progress. Discussed in earlier articles. Urjit Patel Deputy Governor Monetary policy framework: how to strengthen it?
This is the topic of our article. Governor of RBI Eight Members : economics professors, finance experts etc. Urjit My first recommendation is that RBI must target inflation only. Mohan But why focus on inflation only? Monetary Policy: Where to focus? Prices of apple vs Rupee are decided by laws of supply and demand. At present 1 apple sells for Rs. What should he do? Rajan will tweak his monetary policy to reduce the supply of rupee in the market.
Then, 1 apple will sell for Rs. Alternatively, Rajan will open his own refrigerator forex reserveand put some apples dollars for sale. Prices of imported goods are kept in check. Prices of imported crude oil is kept in check. Since exchange rates are kept stable- both importers and exporters can decide their business expansion plans accurately.
Then it is not good for business decisions. Transparency in Decision Making. Aam Juntaa can understand what RBI is trying to accomplish and whether Rajan is succeeding or failing? This method works well to control imported fuel inflation. But cannot control local food inflation. Works well for a small countries. Our population is so large, we cannot sustain on imported food.
We must be self-reliant in food production. Country becomes vulnerable to external shocks. Government is bogus, and causes high food inflation. This also creates imbalance in supply-demand of rupee vs Dollars Apples. Rajan will have hard time controlling this mess. Country becomes vulnerable to Speculative attacks. Forex traders in Europe or China decide to hoard Apples dollars in their refrigerator to create artificial shortage in market, so later then can sell their apples higher commercial insurance terms dictionary. In such speculative attacks, Rajan will have hard time controlling supply-demand of Rupee vs dollars.
Outdated: During WW1 era, most central banks used to follow this Exchange rate targeting strategy. But today, almost all banks in developed countries, have shifted to inflation targeting strategy. What exactly are you trying to accomplish? Multiple indicator strategy worked well between and GDP was good and inflation was kept in check.
But in recent times, this strategy is no longer working- inflation has skyrocketed and GDP is falling day by day. SinceConsumer price index rose to double digits i. They only focus on WPI minus food and fuel. WPI commodity list has been revised in recent times- they added ice cream, oven, cricket ball, guitar and so on. RBI has to make new statistical calculation about each of such busines arenas- number of people employed in it, total bank loans given, their contribution to GDP etc.
Even if Rajan makes best policy, its Impact will be seen after a lag of quarters i. We already learned the limitations of Monetary policy in a developing country, the past article. For example Pressure group informally forces Rajan to: Chindu Please increase SLR ratio. FICCI Please decrease Priority sector lending, CRR and SLR that way more money is left for business loans for corporate giants. Bankers Maai baapplease reduce PSL targets, SLR, CRR and Repo, that way more money is left with us, and we can lend it to middle class and businessmen.
Therefore, Urjit recommends Rajan to dump this multiple indicator method. Because Rajan Easy to track progress. Because CPI data released after every twelve days. Central banks in all advanced economies and Emerging market economies have adopted this method. Except India and China. Rajan has absolutely zero control over this. But under multiple indicator method, Rajan focuses on WPI minus food and fuel inflation. Because he always ignored food and fuel inflation.
But in India, we have three CPIs: Urban, Rural and Combined…if we try to control all three of them, then…. We must focus only on CPI Combined. Its data is released every 12 days. Very easy to monitor, tracks price movement all over India. Mohan Ya but still, Its data is not accurate and…. This only gets fixed from inside the RBI! Mohan But even if Rajan focuses on this Nominal Anchor CPIstill there will be a lag of months before its impacts are seen.
Urjit Brother, no matter which method we use — there will be lag of months before its impact is seen on inflation ground level. Mohan Ok one last obstacle. Governments own policy to fight CPI. For example, whenever prices of sugar, onion or pulses get very high, the government arbitrarily puts export ban on those commodities, start importing them from xyz country, starts distributing them subsidized rates in various cities. Urjit For this I recommend better coordination and data sharing between Government of India and RBI, regarding inflation control.
Why should Rajan only focus on inflation CPI. Other things are also important — like GDP, IIP, employment, investment, exchange rates. Africa 11 6 Russia 14 5 From above table, you can see that Between to China, South Africa and Russia have drastically reduced their inflation. Only India is the EPICFAIL country where inflation to learning trade forex and futures increased- instead of decreasing!
Mohan Whoa, whoa, whoa man slow down. What is real interest rate? How does it affect economy? But instead of buying onions, I put this money in a savings account. Observe what happens with my purchasing power: Onion Rs. This becomes a vicious cycle where you cannot find whether hen came first or the egg came first? Now if you compare India vs [China, Russia, South Africa].
Urjit In other words, when Rajan frames monetary policy, he should only fight against inflation — then low GDP, low IIP will be fixed automatically. What should be his exact CPI target? Mohan This is easy. If bottle of desi liquor was sold Rs. Then Maujaa hi Maujaa. Urjit I hate to break your spiritbut such deflationary trend is not good for economy. So, if prices keep falling and falling, then businessman will suffer losses. He has no motivation to expand business. If prices of everything fall- then custom duty, VAT, excise duty, service tax- their collection will also decrease.
What should be the lower limit of inflation? When CPI gets higher than 6. There will be unanticipated price shocks in food and fuel items, wars, famines and natural disasters. Mohan well, Your recommendation is ambitious, but unrealistic. Urjit It is possible. Let me give you the case study of Chile. Urjit recommended following timeframe: 0 xebec trading services bangladesh i.
If Chile can do it, we can also do it. Urjit Using the same tools available in the present monetary policy framework. Mohan What is policy rate? I recommend that Rajan should continue with it. But it has failed to yield any positive result. What makes you think repo rate can fix our inflation problems? In the previous article on monetary policywe learned that Monetary policy Tool How to Fight inflation? How to fight deflation?
Repo rate Increase repo rate Decrease repo rate. Therefore, to fight inflation repo rate MUST be increased. What will be the consequences of high repo rate? Mohan Wait wait wait. It will kill the growth! High interest rates are not conductive for higher GDP growth. But Indian inflation has become so high, that extreme steps are necessary.
Besides, the RBIs of Australia, Canada, S. Africa, Mexico, Brazil, Israel…… all have taken same measure in past. When inflation became very high, they raised repo rate to level higher than inflation. Only then problem was fixed. Picture abhi baaki hai mere dost. Overall I made three important recommendations.
Both A and B Neither A nor B What do you understand by Real interest rate? Nominal interest rate plus inflation Nominal interest rate minus inflation Nominal interest rate multiplied with inflation None of above. In a futuristic society, if Real interest rate became a positive number, which of the following is most likely to be correct? Fiscal deficit increased at the expense of current account deficit. People have started putting their entire savings into gold. RBI and Government failed in combating inflation.
RBI and government successfully managed to bring down inflation below the nominal interest offered in banks. RBI should ignore fuel, food and service sector inflation and focus on core inflation only. RBI forex trading in india rbi guidelines unemployment frame monetary policy while keeping CPI as the nominal anchor. Switch its focus from multiple indicators to exchange rate stabilization both A and B Neither A nor B.
To Combat inflation, Urjit Patel Committee has recommended RBI to: Keep Repo rate lower than CPI. Keep Reverse repo rate higher than MSF. Forex trading in india rbi guidelines unemployment the value of Reverse repo rate between Repo rate and MSF. Country becomes vulnerable to shocks emanating from the country to which its currency is pegged.
Country becomes immune to speculative attacks in forex trading market. Imported inflation will be kept in check. Choices Only 1 and 2 Only 2 and 3 Only 1 and 3 All 1, 2 and 3. What are the recommendations of Urjit Patel Committee? RBI should adopt the forex trading in india rbi guidelines unemployment CPI rural as the measure of the nominal anchor for policy communication.
Match the following: Hawk Purchases securities under the assumption that they can be sold later at a higher price. Bull Believes that a particular stock or the market as a whole, is headed for a fall in prices. Bear Favors relatively high forex trading in india rbi guidelines unemployment rates in order to keep inflation in check. Nayak Financial products for small businessmen.
So far Comments posted Reply Saikumar Animella Wonderful and amazing explanation love economy love mrunal Reply KS Saurabh This is brillliant. Par agar jaroorat padi to 5th attempt tak denge. Current affairs to prelims me jyaada aata nahi to isko revise nahi karoonga. Biotechnology ki ek book padh Sir plz complete the lecture series. Please Sir, ye bata do kab tak tentative date hai lectures ki.
My first recommendation is that RBI must target inflation only. Please increase SLR ratio. Please decrease Priority sector lending, CRR and SLR that way more money is left for business loans for corporate giants. Maai baapplease reduce PSL targets, SLR, CRR and Repo, that way more money is left with us, and we can lend it to middle class and businessmen.
Hold on a second. But even if Rajan focuses on this Nominal Anchor CPIstill there will be a lag of months before its impacts are seen. Brother, no matter which method we use — there will be lag of months before its impact is seen on inflation ground level. Ok one last obstacle. For this I recommend better coordination and data sharing between Government of India and RBI, regarding inflation control. In other words, when Rajan frames monetary policy, he should only fight against inflation — then low GDP, low IIP will be fixed automatically.
Using the same tools available in the present monetary policy framework. In this article we only learned the first one: Purchases securities under the assumption that they can be sold later at a higher price. Believes that a particular stock or the market as a whole, is headed for a fall in prices. Favors relatively high interest rates in order to keep inflation in check. Favors relatively low interest rates in order to keep deflation in check.
Forex Trading in India
Read this article to learn about the Exchange Rate System in India: Objectives and Reforms ! An exchange-rate regime is the way an authority manages its currency in. Monetary Policy: Where to focus? There are three main ways to frame monetary policy. Focus on Exchange Rate; Focus Multiple indicator (GDP, IIP, Exchange rate, inflation). A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves.