fiscal & monetary policy mitali dipak jigar
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FACULTY OF MANAGEMENT STUDIES,
M.S. UNIVERSITY BAROBA
M.S.PATEL INSTITUTE, FACULTY OF MANAGEMENT
STUDIES Page 2
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Where the mind is without fear and the
head is held high
Where knowledge is free,
Where the world has not been broken up into
fragments by narrow domestic walls,
Where the words come out from the depth of
truth,
Where tireless striving stretches its arms
towards perfection,
Where the clear stream of reason has not lost its
way in the dreary desert sand of dead habits,
Where the mind is led forward by Thee into ever
widening thought and action,
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Into that heaven of freedom, Father, let my country India
awake.
RABINDRANATH TAGORE
Content
SR.NO. PARTICULAR PAGE NO.
1 1.1 Fiscal policy: History of fiscal policy 4
1.2 How fiscal Policy Works : Balancing Act 4
1.3 Stances of fiscal policy 6
1.4 Methods of funding 7
1.5 Economic effects of fiscal policy 8
1.6 Who Does Fiscal Policy Affect? 9
2 2.1 Monetary Policy : History of monetary policy 10
2.2 Overview 12
2.3 Theory of monetary policy 14
2.4 Types of monetary policy 18
2.5 Inflation targeting 18
2.6 Monetary policy tools 21
2.7 Review of Monetary Policy 2010-11: 23
2.7.1 Part A. Monetary Policy 24
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2.7.2 Part B. Development and Regulatory Policies 29
3 3.1 Conclusion & Findings 39
4 4.1 Bibliography 40
Ch -(1) FISCAL POLICY
(1.1) HISTORY OF FISCAL POLICY
Fiscal policy can be contrasted with the other main type of macroeconomic policy,monetary policy, which attempts to stabilize the economy by controlling interest rates andthe money supply. The two main instruments of fiscal policy are government expenditureand taxation. Changes in the level and composition of taxation and government spending
can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity;• The pattern of resource allocation;• The distribution of income.
Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy. It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies areused in various combinations in an effort to direct a country's economic goals. Here wetake a look at how fiscal policy works, how it must be monitored and how its
implementation may affect different people in an economy. Before the Great Depressionin the United States, the government's approach to the economy was laissez faire. Butfollowing the Second World War, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation andthe cost of money. By using a mixture of both monetary and fiscal policies (dependingon the political orientations and the philosophies of those in power at a particular time,one policy may dominate over another), governments are able to control economic phenomena
(1.2) How fiscal Policy Works
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also
known as Keynesian economics, this theory basically states that governments can
influence macroeconomic productivity levels by increasing or decreasing tax levels
and public spending . This influence, in turn, curbs inflation (generally considered to
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be healthy when at a level between 2-3%), increases employment and maintains a
healthy value of money.
Balancing Act
The idea, however, is to find a balance in exercising these influences. For example,
stimulating a stagnant economy runs the risk of rising inflation. This is because an
increase in the supply of money followed by an increase in consumer demand can
result in a decrease in the value of money - meaning that it will take more money to
buy something that has not changed in value.
Let's say that an economy has slowed down. Unemployment levels are up, consumer
spending is down and businesses are not making any money. A government thus
decides to fuel the economy's engine by decreasing taxation, giving consumers more
spending money while increasing government spending in the form of buyingservices from the market (such as building roads or schools). By paying for such
services, the government creates jobs and wages that are in turn pumped into the
economy. Pumping money into the economy is also known as " pump priming " . In the
meantime, overall unemployment levels will fall. With more money in the economy
and less taxes to pay, consumer demand for goods and services increases. This in turn
rekindles businesses and turns the cycle around from stagnant to active.
If, however, there are no reins on this process, the increase in economic productivity can
cross over a very fine line and lead to too much money in the market. This excess in
supply decreases the value of money, while pushing up prices (because of the increasein demand for consumer products). Hence, inflation occurs.
For this reason, fine tuning the economy through fiscal policy alone can be a difficult, if not
improbable, means to reach economic goals. If not closely monitored, the line
between an economy that is productive and one that is infected by inflation can be
easily blurred.
And When The Economy Needs To Be Curbed…
When inflation is too strong, the economy may need a slow down. In such a situation,
a government can use fiscal policy to increase taxes in order to suck money out of the
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economy. Fiscal policy could also dictate a decrease in government spending and
thereby decrease the money in circulation. Of course, the possible negative effects of
such a policy in the long run could be a sluggish economy and high unemployment
levels. Nonetheless, the process continues as the government uses its fiscal policy to
fine tune spending and taxation levels, with the goal of evening out the business
cycles. In economics, fiscal policy is the use of government expenditure and
revenue collection to influence the economy.
Fiscal policy:
Tax policy
Government revenue ·
Government debt
Government spending
Budget deficit and surplus
(1.3) Stances of fiscal policy
The three possible stances of fiscal policy are neutral, expansionary and contractionary. The
simplest definitions of these stances are as follows:
•
A neutral stance of fiscal policy implies a balanced economy. This results in a largetax revenue. Government spending is fully funded by tax revenue and overall the
budget outcome has a neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves government spending exceeding
tax revenue.
• A contractionary fiscal policy occurs when government spending is lower than tax
revenue.
However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax
revenues and of some types of government spending, altering the deficit situation; these are
not considered to be policy changes. Therefore, for purposes of the above definitions,
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"government spending” and "tax revenue" are normally replaced by "cyclically adjusted
government spending" and "cyclically adjusted tax revenue". Thus, for example, a
government budget that is balanced over the course of the business cycle is considered to
represent a neutral fiscal policy stance.
(1.4) Methods of funding
Governments spend money on a wide variety of things, from the military and police to
services like education and healthcare, as well as transfer payments such as welfare
benefits. This expenditure can be funded in a number of different ways:
• Taxation
• Seigniorage, the benefit from printing money
• Borrowing money from the population or from abroad
•
Consumption of fiscal reserves.• Sale of fixed assets (e.g., land).
All of these except taxation are forms of deficit financing.
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Borrowing
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged
securities. These pay interest, either for a fixed period or indefinitely. If the interest and
capital repayments are too large, a nation may default on its debts, usually to foreign
creditors.
Consuming prior surpluses
A fiscal surplus is often saved for future use, and may be invested in local (same currency)
financial instruments, until needed. When income from taxation or other sources falls, as
during an economic slump, reserves allow spending to continue at the same rate, without
incurring additional debt.
(1.5) Economic effects of fiscal policy
Governments use fiscal policy to influence the level of aggregate demand in the economy,
in an effort to achieve economic objectives of price stability, full employment, and
economic growth. Keynesian economics suggests that increasing government spending and
decreasing tax rates are the best ways to stimulate aggregate demand. This can be used intimes of recession or low economic activity as an essential tool for building the framework
for strong economic growth and working towards full employment. In theory, the resulting
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deficits would be paid for by an expanded economy during the boom that would follow; this
was the reasoning behind the New Deal.
Governments can use a budget surplus to do two things: to slow the pace of strong
economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits
that removing spending from the economy will reduce levels of aggregate demand and
contract the economy, thus stabilizing prices.
Economists debate the effectiveness of fiscal stimulus. The argument mostly centers on
crowding out, a phenomena where government borrowing leads to higher interest rates that
offset the stimulative impact of spending. When the government runs a budget deficit, funds
will need to come from public borrowing (the issue of government bonds), overseas
borrowing, or monetizing the debt. When governments fund a deficit with the issuing of
government bonds, interest rates can increase across the market, because government
borrowing creates higher demand for credit in the financial markets. This causes a lower
aggregate demand for goods and services, contrary to the objective of a fiscal stimulus.
Neoclassical economists generally emphasize crowding out while Keynesians argue that
fiscal policy can still be effective especially in a liquidity trap where, they argue, crowding
out is minimal.
Some classical and neoclassical economists argue that crowding out completely negatives
any fiscal stimulus; this is known as the Treasury View[citation needed ], which Keynesian
economics rejects. The Treasury View refers to the theoretical positions of classical
economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal
stimulus. The same general argument has been repeated by some neoclassical economistsup to the present.
In the classical view, expansionary fiscal policy also decreases net exports, which has a
mitigating effect on national output and income. When government borrowing increases
interest rates it attracts foreign capital from foreign investors. This is because, all other
things being equal, the bonds issued from a country executing expansionary fiscal policy
now offer a higher rate of return. In other words, companies wanting to finance projects
must compete with their government for capital so they offer higher rates of return. To
purchase bonds originating from a certain country, foreign investors must obtain that
country's currency. Therefore, when foreign capital flows into the country undergoing fiscalexpansion, demand for that country's currency increases. The increased demand causes that
country's currency to appreciate. Once the currency appreciates, goods originating from that
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country now cost more to foreigners than they did before and foreign goods now cost less
than they did before. Consequently, exports decrease and imports increase.
Other possible problems with fiscal stimulus include the time lag between the
implementation of the policy and detectable effects in the economy, and inflationary effects
driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses
resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a
worker who otherwise would have been unemployed, there is no inflationary effect;
however, if the stimulus employs a worker who otherwise would have had a job, the
stimulus is increasing labor demand while labor supply remains fixed, leading to wage
inflation and therefore price inflation.
(1.6) Who Does Fiscal Policy Affect?
Unfortunately, the effects of any fiscal policy are not the same on everyone. Depending onthe political orientations and goals of the policymakers, a tax cut could affect only the
middle class, which is typically the largest economic group. In times of economic decline
and rising taxation, it is this same group that may have to pay more taxes than the wealthier
upper class.
Similarly, when a government decides to adjust its spending, its policy may affect only a
specific group of people. A decision to build a new bridge, for example, will give work and
more income to hundreds of construction workers. A decision to spend money on building a
new space shuttle, on the other hand, benefits only a small, specialized pool of experts,
which would not do much to increase aggregate employment levels.
Fiscal Straitjacket
The concept of a fiscal straitjacket is a general economic principle that suggests strictconstraints on government spending and public sector borrowing, to limit or regulate the
budget deficit over a time period. The term probably originated from the definition of
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straitjacket: anything that severely confines, constricts, or hinders. Various states in the
United States have various forms of self-imposed fiscal straitjackets.
Ch-(2) MONETARY POLICY
Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest to attain a set of objectives oriented
towards the growth and stability of the economy. These goals usually include stable prices
and low unemployment. Monetary theory provides insight into how to craft optimal
monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary
policy, where an expansionary policy increases the total supply of money in the economy
rapidly, and a contractionary policy decreases the total money supply, or increases it slowly.
Expansionary policy is traditionally used to combat unemployment in a recession by
lowering interest rates, while contractionary policy involves raising interest rates to combat
inflation. Monetary policy is contrasted with fiscal policy, which refers to government
borrowing, spending and taxation.
Monetary policy:
[
(2.1) History of monetary policy
Monetary policy is primarily associated with interest rate and credit . For many centuries
there were only two forms of monetary policy:
(i) Decisions about coinage;
(ii) Decisions to print paper money to create credit.
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Money supply · Central bank Gold standard · Fiat currency
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Interest rates, while now thought of as part of monetary authority, were not generally
coordinated with the other forms of monetary policy during this time. Monetary policy was
seen as an executive decision, and was generally in the hands of the authority with
seigniorage, or the power to coin. With the advent of larger trading networks came the
ability to set the price between gold and silver, and the price of the local currency to foreign
currencies. This official price could be enforced by law, even if it varied from the market
price.With the creation of the Bank of England in 1694, which acquired the
responsibility to print notes and back them with gold , the idea of monetary policy as
independent of executive action began to be established. The goal of monetary policy was
to maintain the value of the coinage, print notes which would trade at par to specie, and
prevent coins from leaving circulation. The establishment of central banks by
industrializing nations was associated then with the desire to maintain the nation's peg to the
gold standard, and to trade in a narrow band with other gold-backed currencies. To
accomplish this end, central banks as part of the gold standard began setting the interest
rates that they charged, both their own borrowers, and other banks who required liquidity.The maintenance of a gold standard required almost monthly adjustments of interest rates.
During the 1870-1920 period, the industrialized nations set up central banking systems,
with one of the last being the Federal Reserve in 1913. By this point the role of the central
bank as the "lender of last resort " was understood. It was also increasingly understood that
interest rates had an effect on the entire economy, in no small part because of the marginal
revolution in economics, which demonstrated how people would change a decision based
on a change in the economic trade-offs.Monetarist macroeconomists have sometimes
advocated simply increasing the monetary supply at a low, constant rate, as the best way of
maintaining low inflation and stable output growth. However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to be
impractical, because of the highly unstable relationship between monetary aggregates and
other macroeconomic variables. Even Milton Friedman acknowledged that money supply
targeting was less successful than he had hoped, in an interview with the Financial Times
on June 7, 2003. Therefore, monetary decisions today take into account a wider range of
factors, such as:
• short term interest rates;
• long term interest rates;
• velocity of money through the economy;
• exchange rates;
• credit quality;
• bonds and equities (corporate ownership and debt);
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• government versus private sector spending/savings;
• international capital flows of money on large scales;
• financial derivatives such as options, swaps, futures contracts, etc.
A small but vocal group of people advocate for a return to the gold standard (the
elimination of the dollar's fiat currency status and even of the Federal Reserve Bank ).
Their argument is basically that monetary policy is fraught with risk and these risks will
result in drastic harm to the populace should monetary policy fail. Others see another
problem with our current monetary policy. The problem for them is not that our money has
nothing physical to define its value, but that fractional reserve lending of that money as a
debt to the recipient, rather than a credit, causes all but a small proportion of society to be
perpetually in debt.In fact, many economists disagree with returning to a gold standard.
They argue that doing so would drastically limit the money supply, and throw away 100
years of advancement in monetary policy. The sometimes complex financial transactions
that make big business easier and safer would be much more difficult if not impossible.
(2.2) Overview
Monetary policy rests on the relationship between the rates of interest in an economy, that
is the price at which money can be borrowed, and the total supply of money. Monetary
policy uses a variety of tools to control one or both of these, to influence outcomes like
economic growth , inflation , exchange rates with other currencies and unemployment .
Where currency is under a monopoly of issuance, or where there is a regulated system of
issuing currency through banks which are tied to a central bank, the monetary authority has
the ability to alter the money supply and thus influence the interest rate (to achieve policy
goals). The beginning of monetary policy as such comes from the late 19th century,
where it was used to maintain the gold standard.
A policy is referred to as contractionary if it reduces the size of the money supply or
increases it only slowly, or if it raises the interest rate. An expansionary policy increases the
size of the money supply more rapidly, or decreases the interest rate. Furthermore,
monetary policies are described as follows: accommodative, if the interest rate set by the
central monetary authority is intended to create economic growth; neutral, if it is intended
neither to create growth nor combat inflation; or tight if intended to reduce inflation.
There are several monetary policy tools available to achieve these ends:
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increasing interest rates by fiat;
reducing the monetary base;and
increasing reserve requirements.
All have the effect of contracting the money supply; and, if reversed, expand the money
supply.
Since the 1970s, monetary policy has generally been formed separately from
fiscal policy.
Even prior to the 1970s, the Bretton Woods system still ensured that most nations would
form the two policies separately.Within almost all modern nations, special institutions (such
as the Federal Reserve System in the United States, the Bank of England, the European Central Bank , the People's Bank of China, and the Bank of Japan) exist which have the task
of executing the monetary policy and often independently of the executive. In general, these
institutions are called central banks and often have other responsibilities such as
supervising the smooth operation of the financial system.
The primary tool of monetary policy is open market operations . This entails managing the
quantity of money in circulation through the buying and selling of various financial
instruments, such as treasury bills, company bonds, or foreign currencies. All of these
purchases or sales result in more or less base currency entering or leaving market
circulation.Usually, the short term goal of open market operations is to achieve a specific
short term interest rate target. In other instances, monetary policy might instead entail the
targeting of a specific exchange rate relative to some foreign currency or else relative to
gold. For example, in the case of the USA the Federal Reserve targets the federal funds rate,
the rate at which member banks lend to one another overnight; however, the monetary
policy of China is to target the exchange rate between the Chinese renminbi and a basket of
foreign currencies.
The other primary means of conducting monetary policy include:
(i) Discount window lending (lender of last resort);
(ii) Fractional deposit lending (changes in the reserve requirement);
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(iii) Moral suasion (cajoling certain market players to achieve specified
outcomes);
(iv) Open mouth operations" (talking monetary policy with the market).
(2.3)Theory
Monetary policy is the process by which the government, central bank, or monetary
authority of a country controls (i) the supply of money, (ii) availability of money, and (iii)
cost of money or rate of interest to attain a set of objectives oriented towards the growth
and stability of the economy. Monetary theory provides insight into how to craft optimal
monetary policy.
Monetary policy rests on the relationship between the rates of interest in an economy, that is
the price at which money can be borrowed, and the total supply of money. Monetary policy
uses a variety of tools to control one or both of these, to influence outcomes like economic
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growth, inflation, exchange rates with other currencies and unemployment. Where currency
is under a monopoly of issuance, or where there is a regulated system of issuing currency
through banks which are tied to a central bank, the monetary authority has the ability to
alter the money supply and thus influence the interest rate (to achieve policy goals).
It is important for policymakers to make credible announcements, and deprecate interest
rate targets as they are non-important and irrelevant in regarding to monetary policies. If
private agents (consumers and firms) believe that policymakers are committed to lowering
inflation, they will anticipate future prices to be lower than otherwise (how those
expectations are formed is an entirely different matter; compare for instance rational
expectations with adaptive expectations). If an employee expects prices to be high in the
future, he or she will draw up a wage contract with a high wage to match these prices.
Hence, the expectation of lower wages is reflected in wage-setting behavior between
employees and employers (lower wages since prices are expected to be lower) and since
wages are in fact lower there is no demand pull inflation because employees are receiving asmaller wage and there is no cost push inflation because employers are paying out less in
wages.
To achieve this low level of inflation, policymakers must have credible
announcements; that is, private agents must believe that these announcements will
reflect actual future policy. If an announcement about low-level inflation targets is made but
not believed by private agents, wage-setting will anticipate high-level inflation and so
wages will be higher and inflation will rise. A high wage will increase a consumer's demand
(demand pull inflation) and a firm's costs (cost push inflation), so inflation rises. Hence, if a
policymaker's announcements regarding monetary policy are not credible, policy will nothave the desired effect.
If policymakers believe that private agents anticipate low inflation, they have an incentive
to adopt an expansionist monetary policy (where the marginal benefit of increasing
economic output outweighs the marginal cost of inflation); however, assuming private
agents have rational expectations, they know that policymakers have this incentive. Hence,
private agents know that if they anticipate low inflation, an expansionist policy will be
adopted that causes a rise in inflation. Consequently, (unless policymakers can make their
announcement of low inflation credible), private agents expect high inflation. This
anticipation is fulfilled through adaptive expectation (wage-setting behavior);so, there is
higher inflation (without the benefit of increased output). Hence, unless credible
announcements can be made, expansionary monetary policy will fail.
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Announcements can be made credible in various ways. One is to establish an independent
central bank with low inflation targets (but no output targets). Hence, private agents know
that inflation will be low because it is set by an independent body. Central banks can be
given incentives to meet targets (for example, larger budgets, a wage bonus for the head of
the bank) to increase their reputation and signal a strong commitment to a policy goal.
Reputation is an important element in monetary policy implementation. But the idea of
reputation should not be confused with commitment.
While a central bank might have a favorable reputation due to good performance in
conducting monetary policy, the same central bank might not have chosen any particular
form of commitment (such as targeting a certain range for inflation). Reputation plays a
crucial role in determining how much would markets believe the announcement of a
particular commitment to a policy goal but both concepts should not be assimilated. Also,
note that under rational expectations, it is not necessary for the policymaker to have
established its reputation through past policy actions; as an example, the reputation of thehead of the central bank might be derived entirely from his or her ideology, professional
background, public statements, etc.
In fact it has been argued that to prevent some pathologies related to the time-inconsistency
of monetary policy implementation (in particular excessive inflation), the head of a central
bank should have a larger distaste for inflation than the rest of the economy on average.
Hence the reputation of a particular central bank is not necessary tied to past performance,
but rather to particular institutional arrangements that the markets can use to form inflation
expectations.
Despite the frequent discussion of credibility as it relates to monetary policy, the exact
meaning of credibility is rarely defined. Such lack of clarity can serve to lead policy away
from what is believed to be the most beneficial. For example, capability to serve the public
interest is one definition of credibility often associated with central banks. The reliability
with which a central bank keeps its promises is also a common definition. While everyone
most likely agrees a central bank should not lie to the public, wide disagreement exists on
how a central bank can best serve the public interest. Therefore, lack of definition can lead
people to believe they are supporting one particular policy of credibility when they are
really supporting another.
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Trends in central banking
The central bank influences interest rates by expanding or contracting the monetary base,
which consists of currency in circulation and banks' reserves on deposit at the central bank .
The primary way that the central bank can affect the monetary base is by open market
operations or sales and purchases of second hand government debt, or by changing the
reserve requirements. If the central bank wishes to lower interest rates, it purchases
government debt, thereby increasing the amount of cash in circulation or crediting banks'
reserve accounts. Alternatively, it can lower the interest rate on discounts or overdrafts
(loans to banks secured by suitable collateral, specified by the central bank). If the interest
rate on such transactions is sufficiently low, commercial banks can borrow from the central
bank to meet reserve requirements and use the additional liquidity to expand their balancesheets, increasing the credit available to the economy. Lowering reserve requirements has a
similar effect, freeing up funds for banks to increase loans or buy other profitable assets.
A central bank can only operate a truly independent monetary policy when the exchange
rate is floating. If the exchange rate is pegged or managed in any way, the central bank will
have to purchase or sell foreign exchange. These transactions in foreign exchange will have
an effect on the monetary base analogous to open market purchases and sales of
government debt; if the central bank buys foreign exchange, the monetary base expands,
and vice versa. But even in the case of a pure floating exchange rate, central banks and
monetary authorities can at best "lean against the wind" in a world where capital is mobile.
Accordingly, the management of the exchange rate will influence domestic monetary
conditions. To maintain its monetary policy target, the central bank will have to sterilize or
offset its foreign exchange operations. For example, if a central bank buys foreign exchange
(to counteract appreciation of the exchange rate), base money will increase. Therefore, to
sterilize that increase, the central bank must also sell government debt to contract the
monetary base by an equal amount. It follows that turbulent activity in foreign exchange
markets can cause a central bank to lose control of domestic monetary policy when it is also
managing the exchange rate.
In the 1980s, many economists began to believe that making a nation's central bank
independent of the rest of executive government is the best way to ensure an optimal
monetary policy, and those central banks which did not have independence began to gain it.
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This is to avoid overt manipulation of the tools of monetary policies to effect political goals,
such as re-electing the current government. Independence typically means that the members
of the committee which conducts monetary policy have long, fixed terms. Obviously, this is
a somewhat limited independence.
In the 1990s, central banks began adopting formal, public inflation targets with the goal of
making the outcomes, if not the process, of monetary policy more transparent. In other
words, a central bank may have an inflation target of 2% for a given year, and if inflation
turns out to be 5%, then the central bank will typically have to submit an explanation.
The Bank of England exemplifies both these trends. It became independent of government
through the Bank of England Act 1998 and adopted an inflation target of 2.5% RPI (now
2% of CPI).
The debate rages on about whether monetary policy can smooth business cycles or not. A
central conjecture of Keynesian economics is that the central bank can stimulate aggregate
demand in the short run, because a significant number of prices in the economy are fixed in
the short run and firms will produce as many goods and services as are demanded (in the
long run, however, money is neutral, as in the neoclassical model). There is also the
Austrian school of economics, which includes Friedrich von Hayek and Ludwig von
Mises's arguments, but most economists fall into either the Keynesian or neoclassical camps
on this issue.
Developing countries
Developing countries may have problems establishing an effective operating monetary
policy. The primary difficulty is that few developing countries have deep markets in
government debt. The matter is further complicated by the difficulties in forecasting money
demand and fiscal pressure to levy the inflation tax by expanding the monetary base
rapidly. In general, the central banks in many developing countries have poor records in
managing monetary policy. This is often because the monetary authority in a developing
country is not independent of government, so good monetary policy takes a backseat to the
political desires of the government or are used to pursue other non-monetary goals. For this
and other reasons, developing countries that want to establish credible monetary policy may
institute a currency board or adopt dollarization. Such forms of monetary institutions thus
essentially tie the hands of the government from interference and, it is hoped, that such
policies will import the monetary policy of the anchor nation.
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Recent attempts at liberalizing and reforming financial markets (particularly the
recapitalization of banks and other financial institutions in Nigeria and elsewhere) are
gradually providing the latitude required to implement monetary policy frameworks by the
relevant central banks.
(2.4) Types of monetary policy
In practice, all types of monetary policy involve modifying the amount of base currency
(M0) in circulation. This process of changing the liquidity of base currency through the
open sales and purchases of (government-issued) debt and credit instruments is called open
market operations.Constant market transactions by the monetary authority modify the
supply of currency and this impacts other market variables such as short term interest rates
and the exchange rate.The distinction between the various types of monetary policy lies
primarily with the set of instruments and target variables that are used by the monetary
authority to achieve their goals.
Monetary Policy: Target Market Variable: Long Term Objective:
Inflation TargetingInterest rate on overnightdebt
A given rate of change in the CPI
Price Level TargetingInterest rate on overnightdebt
A specific CPI number
Monetary AggregatesThe growth in moneysupply
A given rate of change in the CPI
Fixed Exchange RateThe spot price of thecurrency
The spot price of the currency
Gold Standard The spot price of goldLow inflation as measured by the gold price
Mixed Policy Usually interest rates Usually unemployment + CPI change
The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard resultsin a relatively fixed regime towards the currency of other countries on the gold standard anda floating regime towards those that are not. Targeting inflation, the price level or other
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monetary aggregates implies floating exchange rate unless the management of the relevantforeign currencies is tracking exactly the same variables (such as a harmonized consumer price index).
(2.5) Inflation targeting
Under this policy approach the target is to keep inflation, under a particular definition suchas Consumer Price Index, within a desired range.The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used isgenerally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rateor something similar. The interest rate target is maintained for a specific duration usingopen market operations. Typically the duration that the interest rate target is kept constantwill vary between months and years. This interest rate target is usually reviewed on amonthly or quarterly basis by a policy committee. Changes to the interest rate target aremade in response to various market indicators in an attempt to forecast economic trends andin so doing keep the market on track towards achieving the defined inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the interestrate in response to changes in the inflation rate and the output gap. The rule was proposed by John B. Taylor of Stanford University.The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It is currently used in Australia, Brazil,Canada, Chile, Colombia, the Eurozone, New Zealand, Norway, Iceland, India, Philippines,Poland, Sweden, South Africa, Turkey, and the United Kingdom.
Price level targeting
Price level targeting is similar to inflation targeting except that CPI growth in one year isoffset in subsequent years such that over time the price level on aggregate does not move.
Monetary aggregates
In the 1980s, several countries used an approach based on a constant growth in the moneysupply. This approach was refined to include different classes of money and credit (M0, M1etc.). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman. This approach is also sometimes called monetarism.While most monetary policy focuses on a price signal of one form or another, this approachis focused on monetary quantities.
Fixed exchange rate
This policy is based on maintaining a fixed exchange rate with a foreign currency. There arevarying degrees of fixed exchange rates, which can be ranked in relation to how rigid the
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fixed exchange rate is with the anchor nation. Under a system of fiat fixed rates, the localgovernment or monetary authority declares a fixed exchange rate but does not actively buyor sell currency to maintain the rate. Instead, the rate is enforced by non-convertibilitymeasures. In this case there is a black market exchange rate where the currency trades at itsmarket/unofficial rate.
Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until themonetary authority intervenes to buy or sell as necessary to maintain the exchange ratewithin the band. Under a system of fixed exchange rates maintained by a currency boardevery unit of local currency must be backed by a unit of foreign currency. This ensures thatthe local monetary base does not inflate without being backed by hard currency andeliminates any worries about a run on the local currency by those wishing to convert thelocal currency to the hard currency. Under dollarization, foreign currency is used freely asthe medium of exchange either exclusively or in parallel with local currency. This outcome
can come about because the local population has lost all faith in the local currency, or itmay also be a policy of the government. These policies often abdicate monetary policy tothe foreign monetary authority or government as monetary policy in the pegging nationmust align with monetary policy in the anchor nation to maintain the exchange rate. Thedegree to which local monetary policy becomes dependent on the anchor nation depends onfactors such as capital mobility, openness, credit channels and other economic factors.
Gold standard
The gold standard is a system in which the price of the national currency is measured inunits of gold bars and is kept constant by the daily buying and selling of base currency to
other countries and nationals. The selling of gold is very important for economic growthand stability.The gold standard might be regarded as a special case of the "Fixed ExchangeRate" policy. And the gold price might be regarded as a special type of "Commodity PriceIndex".Today this type of monetary policy is not used anywhere in the world, although aform of gold standard was used widely across the world between the mid-19th centurythrough 1971. Its major advantages were simplicity and transparency.The major disadvantage of a gold standard is that it induces deflation, which occurs whenever economies grow faster than the gold supply. When an economy grows faster than its moneysupply, the same amount of money is used to execute a larger number of transactions. Theonly way to make this possible is to lower the nominal cost of each transaction, whichmeans that prices of goods and services fall, and each unit of money increases in value.
Deflation can cause economic problems, for instance, it tends to increase the ratio of debtsto assets over time. As an example, the monthly cost of a fixed-rate home mortgage staysthe same, but the dollar value of the house goes down, and the value of the dollars requiredto pay the mortgage goes up. William Jennings Bryan rose to national prominence when he built his historic (though unsuccessful) 1896 presidential campaign around the argument
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that deflation caused by the gold standard made it harder for everyday citizens to start new businesses, expand their farms, or build new homes.
Policy of various nations
•
Australia - Inflation targeting• Brazil - Inflation targeting• Canada - Inflation targeting• Chile - Inflation targeting• China - Monetary targeting and targets a currency basket• Colombia - Inflation targeting• Eurozone - Inflation targeting• Hong Kong - Currency board (fixed to US dollar)• India - Multiple indicator approach• New Zealand - Inflation targeting• Norway - Inflation targeting•
Singapore - Exchange rate targeting• South Africa - Inflation targeting• Switzerland - Inflation targeting• Turkey - Inflation targeting• United Kingdom- Inflation targeting, alongside secondary targets on 'output and
employment'.• United States- Mixed policy (and since the 1980s it is well described by the " Taylor
rule," which maintains that the Fed funds rate responds to shocks in inflation andoutput)
(2.6) Monetary policy tools
Monetary base
Monetary policy can be implemented by changing the size of the monetary base. Thisdirectly changes the total amount of money circulating in the economy. A central bank canuse open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hardcurrency payment, it alters the amount of currency in the economy, thus altering themonetary base.
Reserve requirements
The monetary authority exerts regulatory control over banks. Monetary policy can beimplemented by changing the proportion of total assets that banks must hold in reserve withthe central bank. Banks only maintain a small portion of their assets as cash available for
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immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. Bychanging the proportion of total assets to be held as liquid cash, the Federal Reservechanges the availability of loanable funds. This acts as a change in the money supply.Central banks typically do not change the reserve requirements often because it creates veryvolatile changes in the money supply due to the lending multiplier.
Discount window lending
Discount window lending is where the commercial banks, and other depository institutions,are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates. This enables the institutions to vary credit conditions, there by affecting the money supply. It is of note that the Discount Window is the onlyinstrument which the Central Banks do not have total control over. By affecting the moneysupply, it is theorized, that monetary policy can establish ranges for inflation,unemployment, interest rates ,and economic growth. A stable financial environment iscreated in which savings and investment can occur, allowing for the growth of the economy
as a whole.
Interest rates
The contraction of the monetary supply can be achieved indirectly by increasing thenominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set thediscount rate, as well as achieve the desired Federal funds rate by open market operations.This rate has significant effect on other market interest rates, but there is no perfectrelationship. In the United States open market operations are a relatively small part of thetotal volume in the bond market. One cannot set independent targets for both the monetary
base and the interest rate because they are both modified by a single tool — open marketoperations; one must choose which one to control. In other nations, the monetary authoritymay be able to mandate specific interest rates on loans, savings accounts or other financialassets. By raising the interest rate(s) under its control, a monetary authority can contract themoney supply, because higher interest rates encourage savings and discourage borrowing.Both of these effects reduce the size of the money supply.
Currency board
A currency board is a monetary arrangement that pegs the monetary base of one country toanother, the anchor nation. As such, it essentially operates as a hard fixed exchange rate,
whereby local currency in circulation is backed by foreign currency from the anchor nationat a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreigncurrency must be held in reserves with the currency board. This limits the possibility for the
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local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold:
1. To import monetary credibility of the anchor nation;2. To maintain a fixed exchange rate with the anchor nation;
3. To establish credibility with the exchange rate
In theory, it is possible that a country may peg the local currency to more than one foreigncurrency; although, in practice this has never happened. A gold standard is a special case of a currency board where the value of the national currency is linked to the value of goldinstead of a foreign currency.The currency board in question will no longer issue fiat money but instead will only issue a set number of units of local currency for each unit of foreigncurrency it has in its vault. The surplus on the balance of payments of that country isreflected by higher deposits local banks hold at the central bank as well as higher depositsof the exporting firms at their local banks. The growth of the domestic money supply cannow be coupled to the additional deposits of the banks at the central bank that equals
additional hard foreign exchange reserves in the hands of the central bank. The virtue of thissystem is that questions of currency stability no longer apply. The drawbacks are that thecountry no longer has the ability to set monetary policy according to other domesticconsiderations, and that the fixed exchange rate will, to a large extent, also fix a country'sterms of trade, irrespective of economic differences between it and its trading partners.
Unconventional monetary policy at the zero bound
Other forms of monetary policy, particularly used when interest rates are at or near 0% and
there are concerns about deflation or deflation is occurring, are referred to asunconventional monetary policy. These include credit easing, quantitative easing, andsignaling. In credit easing, a central bank purchases private sector assets, in order toimprove liquidity and improve access to credit. Signaling can be used to lower marketexpectations for future interest rates. For example, during the credit crisis of 2008, the USFederal Reserve indicated rates would be low for an “extended period”, and the Bank of Canada made a “conditional commitment” to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010.
(2.7) Review of Monetary Policy 2010-11
The Monetary Policy for 2010-11 is set against a rather complex economic backdrop.Although the situation is more reassuring than it was a quarter ago, uncertainty about the
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shape and pace of global recovery persists. Private spending in advanced economiescontinues to be constrained and inflation remains generally subdued making it likely thatfiscal and monetary stimuli in these economies will continue for an extended period.Emerging market economies (EMEs) are significantly ahead on the recovery curve, butsome of them are also facing inflationary pressures.
India’s growth-inflation dynamics are in contrast to the overall global scenario. Theeconomy is recovering rapidly from the growth slowdown but inflationary pressures, whichwere triggered by supply side factors, are now developing into a wider inflationary process.As the domestic balance of risks shifts from growth slowdown to inflation, our policystance must recognise and respond to this transition. While global policy co-ordination wascritical in dealing with a worldwide crisis, the exit process will necessarily be differentiatedon the basis of the macroeconomic condition in each country. India’s rapid turnaround after the crisis induced slowdown evidences the resilience of our economy and our financialsector. However, this should not divert us from the need to bring back into focus the twinchallenges of macroeconomic stability and financial sector development.
This statement is organised in two parts.
Part A covers Monetary Policy and is divided into four Sections:
Section I provides an overview of global and domestic macroeconomic developments
Section II sets out the outlook and projections for growth, inflation and monetaryaggregates;
SectionIII explains the stance of monetary policy; and
Section IV specifies the monetary measures.
Part B covers Developmental and Regulatory Policies and is organised into six sections:
Section I: Financial Stability,
Section II :Interest Rate Policy,
Section III FinancialMarkets
SectionIV Credit Delivery and Financial Inclusion
Section V Regulatory and Supervisory Measures for Commercial Banks and
Section VI Institutional Developments.
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(2.7.1) Part A. Monetary Policy
Section I The State of the Economy
(a) Global Economy
The global economy continues to recover amidst ongoing policy support and improvingfinancial market conditions. The recovery process is led by EMEs, especially those in Asia,as growth remains weak in advanced economies. The global economy continues to faceseveral challenges such as high levels of unemployment, which are close to 10 per cent inthe US and the Euro area. Despite signs of renewed activity in manufacturing and initialimprovement in retail sales, the prospects of economic recovery in Europe are clouded bythe acute fiscal strains in some countries.
(b)Domestic Economy
The Reserve Bank had projected the real GDP growth for 2009-10 at 7.5 per cent. Theadvance estimates released by the Central Statistical Organisation (CSO) in early February2010 placed the real GDP growth during 2009-10 at 7.2 per cent. The final real GDPgrowth for 2009-10 may settle between 7.2 and 7.5 per cent. A sharp recovery of growthduring 2009-10 despite the worst south-west monsoon since 1972 attests to the resilience of the Indian economy. On the demand side, the contribution of various components to growthin 2009-10 was as follows: private consumption (36 per cent), government consumption (14 per cent), fixed investments (26 per cent) and net exports (20 per cent). The monetary andfiscal stimulus measures initiated in the wake of the global financial crisis played animportant role, first in mitigating the adverse impact from contagion and then in ensuring
that the economy recovered quickly.
However, the developments on the inflation front are worrisome. The headline inflation, asmeasured by year-on-year variation in Wholesale Price Index (WPI), accelerated from 0.5 per cent in September 2009 to 9.9 per cent in March 2010, exceeding the Reserve Bank’s baseline projection of 8.5 per cent for March 2010 During 2009-10, the CentralGovernment raised Rs.3,98,411 crore (net) through the market borrowing programme whilethe state governments mobilised Rs.1,14,883 crore (net). This large borrowing wasmanaged in a non-disruptive manner through a combination of active liquidity managementmeasures such as front-loading of the borrowing calendar, unwinding of securities under themarket stabilisation scheme (MSS) and open market operation (OMO) purchases. The
Union Budget for 2010-11 has begun the process of fiscal consolidation by budgetinglower fiscal deficit (5.5 per cent of GDP in 2010-11 as compared with 6.7 per cent in
2009-10) and revenue deficit (4.0 per cent of GDP in 2010-11 as compared with 5.3 per
cent in 2009-10). As a result, the net market borrowing requirement of the Central
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Government in 2010-11 is budgeted lower at Rs.3,45,010 crore as compared with that
in the previous year.
The current account deficit during April-December 2009 was US$ 30 billion as comparedwith US$ 28 billion for the corresponding period of 2008. Net capital inflows at US$ 42
billion were also substantially higher than US$ 7 billion in the corresponding period lastyear. Consequently, on a balance of payments basis (i.e., excluding valuation effects),foreign exchange reserves increased by US$ 11 billion as against a decline of US$ 20 billion during the corresponding period a year ago. Foreign exchange reserves stood at US$279 billion as on March 31, 2010. The six-currency trade-based real effective exchange rate(1993-94=100) appreciated by 15.5 per cent during 2009-10 up to February as against 10.4 per cent depreciation in the corresponding period of the previous year.
Section II Outlook and Projections
(a)Global Outlook
Globally, headline inflation rates rose between November 2009 and January 2010,softened in February 2010 on account of moderation of food, metal and crude prices andagain rose marginally in some major economies in March 2010. Core inflation continued todecline in the US on account of substantial resource slack. Inflation expectations inadvanced countries also remain stable. Though inflation has started rising in several EMEs,India is a significant outlier with inflation rates much higher than in other EMEs.
(b)Domestic Outlook
Surveys generally support the perception of a consolidating recovery. According to theReserve Bank’s quarterly industrial outlook survey, although the business expectation index(BEI) showed seasonal moderation from 120.6 in Q4 of 2009-10 to 119.8 in Q1 of 2010-11,it was much higher in comparison with the level of 96.4 a year ago. The improved performance of the industrial sector is also reflected in the improved profitability in thecorporate sector. Service sector activities have shown buoyancy, especially during the latter half of 2009-10. The leading indicators of various sectors such as tourist arrivals,commercial vehicles production and traffic at major ports show significant improvement. Asustained increase in bank credit and in the financial resources raised by the commercialsector from non-bank sources also suggest that the recovery is gaining momentum.On balance, under the assumption of a normal monsoon and sustenance of good performance of the industrial and services sectors on the back of rising domestic and external demand, for policy purposes the baseline projection of real GDP growth for 2010-11 is placed at 8.0 per cent with an upside bias
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The Reserve Bank’s baseline projection of WPI inflation for March 2010 was 8.5 per cent.However, some subsequent developments on both supply and demand sides pushed upinflation. Enhancement of excise duty and restoration of the basic customs duty on crude petroleum and petroleum products and the increase in prices of iron ore and coal had asignificant impact on WPI inflation. In addition, demand side pressures also re-emerged asreflected in the sharp increase in non-food manufactured products inflation from 0.7 per cent to 4.7 per cent between December 2009 and March 2010. Going forward, three major uncertainties cloud the outlook for inflation. First, the prospects of the monsoon in 2010-11are not yet clear. Second, crude prices continue to be volatile. Third, there is evidence of
demand side pressures building up. On balance, keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflationfor March 2011 is placed at 5.5 per cent
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Notwithstanding the current inflation scenario, it is important to recognise that in the last
decade, the average inflation rate, measured both in terms of WPI and CPI, had moderated
to about 5 per cent from the historical trend rate of about 7.5 per cent. Against this
background, the conduct of monetary policy will continue to condition and contain
perception of inflation in the range of 4.0-4.5 per cent. This will be in line with the medium-
term objective of 3.0 per cent inflation consistent with India’s broader integration into the
global economy.
( c)Monetary Aggregates
During 2009-10, money supply (M3) growth decelerated from over 20.0 per cent at the beginning of the financial year to 16.4 per cent in February 2010 before increasing to 16.8
per cent by March 2010, slightly above the Reserve Bank’s indicative projection of 16.5 per cent. This was reflected in non-food credit growth of 16.9 per cent, above the indicative projection of 16.0 per cent. Keeping in view the need to balance the resource demand tomeet credit offtake by the private sector and government borrowings, monetary projectionshave been made consistent with the growth and inflation outlook. For policy purposes, M3growth for 2010-11 is placed at 17.0 per cent. Consistent with this, aggregate deposits of SCBs are projected to grow by 18.0 per cent. The growth in non-food credit of SCBs is placed at 20.0 per cent.
(d) Risk Factors
First, uncertainty persists about the pace and shape of global recovery. Fiscal stimulusmeasures played a major role in the recovery process in many countries by compensatingfor the fall in private demand. Private demand in major advanced economies continues to beweak due to high unemployment rates, weak income growth and tight credit conditions.
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There is a risk that once the impact of public spending wanes, the recovery process will bestalled. Therefore, the prospects of sustaining the recovery hinge strongly on the revival of private consumption and investment. While recovery in India is expected to be driven predominantly by domestic demand, significant trade, financial and sentiment linkagesindicate that a sluggish and uncertain global environment can adversely impact the Indian
economy. (1) if the global recovery does gain momentum,commodity and energy prices, which have been on the rise during the last one year, mayharden further. Increase in global commodity prices could, therefore, add to inflationary pressures. (2) from the perspective of bothdomestic demand and inflation management, the 2010 south-west monsoon is a criticalfactor. The current assessment of softening of domestic inflation around mid-2010 iscontingent on a normal monsoon and moderation in food prices. Any unfavourable patternin spatial and temporal distribution of rainfall could exacerbate food inflation. In the currentcontext, an unfavourable monsoon could also impose a fiscal burden and dampen rural
consumer and investment demand. (3 ) it is
unlikely that the large monetary expansion in advanced economies will be unwound in the
near future. Accommodative monetary policies in the advanced economies, coupled with better growth prospects in EMEs including India, are expected to trigger large capital flowsinto the EMEs. While the absorptive capacity of the Indian economy has been increasing,excessive flows pose a challenge for exchange rate and monetary management. The rupeehas appreciated sharply in real terms over the past one year. Pressures from higher capitalflows combined with the prevailing rate of inflation will only reinforce that tendency. Bothexporters, whose prospects are just beginning to turn, and producers, who compete withimports in domestic markets, are getting increasingly concerned about the external sector dynamics.
SectionIII The Policy Stance
In the wake of the global economic crisis, the Reserve Bank pursued an accommodativemonetary policy beginning mid-September 2008. This policy instilled confidence in market participants, mitigated the adverse impact of the global financial crisis on the economy andensured that the economy started recovering ahead of most other economies. The processwas carried forward by the second phase of exit when the Reserve Bank announced a 75 basis points increase in the CRR in the Third Quarter Review of January 2010. As inflationcontinued to increase, driven significantly by the prices of non-food manufactured goods,and exceeded the Reserve Bank’s baseline projection of 8.5 per cent for March 2010, theReserve Bank responded expeditiously with a mid-cycle increase of 25 basis points each inthe policy repo rate and the reverse repo rate under the LAF on March 19, 2010. Despite
the increase of 25 basis points each in the repo rate and the reverse repo rate, our real policyrates are still negative. With the recovery now firmly in place, we need to move in acalibrated manner in the direction of normalising our policy instruments. notwithstandinglower budgeted government borrowings in 2010-11 than in the year before, fresh issuance
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of securities will be 36.3 per cent higher than in the previous year. This presents a dilemmafor the Reserve Bank..
. Against this backdrop, the stance of monetary policy of the Reserve Bank is intended to:
•
Anchor inflation expectations, while being prepared to respond appropriately,swiftly and effectively to further build-up of inflationary pressures.
• Actively manage liquidity to ensure that the growth in demand for credit by
both the private and public sectors is satisfied in a non-disruptive way.
• Maintain an interest rate regime consistent with price, output and financial
stability.
Section IV. Monetary Measures
1) Bank Rate The Bank Rate has been retained at 6.0 per cent.2) Repo Rate Increase the repo rate under the Liquidity Adjustment Facility
(LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.3) Reverse Repo Rate
Increase the reverse repo rate under the LAF by 25 basis pointsfrom 3.5 per cent to 3.75 per cent with immediate effect.
4) Cash Reserve Ratio
Increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities(NDTL) effective the fortnight beginning April 24, 2010. . As a result of the
increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbedfrom the system.
(2.7.2) Part B. Development and Regulatory Policies
Over the last several years, the Reserve Bank has undertaken wide-ranging financial sector reforms to improve financial intermediation and maintain financial stability. This processhas now become more intensive with a focus on drawing appropriate lessons from theglobal financial crisis and putting in place a regulatory regime that is alert to possible build-up of financial imbalances. The focus of the Reserve Bank’s regulation will continue to be
to improve the efficiency of the banking sector while maintaining financial stability.Simultaneously, it will vigorously pursue the financial inclusion agenda to make financialsector development more inclusive.
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SectionI. Financial Stability
The first Financial Stability Report (FSR) was released on March 25, 2010. This Report isan attempt at institutionalising the focus on financial stability and making it an integral partof the policy framework. The first FSR makes an assessment of the strength of the financial
sector, with particular focus on banks, and has raised some concerns, including risinginflation, high government borrowings and likely surge in capital flows, from the financialstability standpoint. The FSR observed that the banks remained well-capitalised with higher core capital and sustainable financial leverage. Further, stress tests for credit and marketrisk confirmed banks’ resilience to withstand high stress. The FSR also emphasised theneed for evolving a stronger supervisory regime for systemically important non-deposittaking non-banking financial companies (NBFCs-ND-SI) and strengthening the monitoringand oversight framework for systemically important financial conglomerates. Overall risk to financial stability was found to be limited. However, the recent financial turmoil hasclearly demonstrated that financial stability cannot be taken for granted, and that themaintenance of financial stability requires constant vigilance, especially during normal
times to detect and mitigate any incipient signs of instability. Going forward, the FinancialStability Reports will be published half-yearly.
SectionII. Interest Rate Policy
As indicated in the Annual Policy Statement of April 2009, the Reserve Bank constituteda Working Group on Benchmark Prime Lending Rate (Chairman: Shri Deepak Mohanty) toreview the present benchmark prime lending rate (BPLR) system and suggest changes tomake credit pricing more transparent. The Working Group submitted its report in October 2009 and the same was placed on the Reserve Bank’s website for public comments. Based
on the recommendations of the Group and the suggestions from various stakeholders, thedraft guidelines on Base Rate were placed on the Reserve Bank’s website in February 2010.In the light of the comments/suggestions received, it has been decided to mandate banks
to switch over to the system of Base Rate from July 1, 2010. Guidelines on the Base Ratesystem were issued on April 9, 2010. It is expected that the Base Rate system will facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of transmission of monetary policy.
SectionIII. Financial Markets
1) The Interest Rate
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The Interest Rate Futures contract on 10-year notional coupon bearing Government of Indiasecurity was introduced on August 31, 2009. Based on the market feedback and therecommendations of the Technical Advisory Committee (TAC) on the Money, ForeignExchange and Government Securities Markets, it is proposed:
•
to introduce Interest Rate Futures on 5-year and 2-year notional coupon bearingsecurities and 91-day Treasury Bills. The RBI-SEBI Standing Technical Committeewill finalise the product design and operational modalities for introduction of these products on the exchanges.
2) Regulation of Non-Convertible Debentures (NCDs) of Maturity of
Less than One Year
As indicated in the Second Quarter Review of October 2009, the draft guidelines on theregulation of non-convertible debentures (NCDs) of maturity of less than one year were placed on the Reserve Bank’s website on November 3, 2009 for comments/feedback.
The comments/feedback received were examined and also deliberated by the TAC on theMoney, Foreign Exchange and Government Securities Markets. Accordingly, it is proposed:
3) Introduction of Credit Default Swaps (CDS)
As indicated in the Second Quarter Review of October 2009, the Reserve Bank constitutedan internal Working Group to finalise the operational framework for introduction of plainvanilla over-the-counter (OTC) single-name CDS for corporate bonds for resident entitiessubject to appropriate safeguards. The Group is in the process of finalising a framework suitable for the Indian market, based on consultations with market participants/experts and
study of international experience.
.
4) Introduction of Exchange-Traded Currency Option Contracts
Currently, residents in India are permitted to trade in futures contracts in four currency pairs on two recognised stock exchanges. In order to expand the menu of tools for hedgingcurrency risk, it has been decided,to permit the recognised stock exchanges to introduce plain vanilla currency options on spot US Dollar/Rupee exchange rate for residents.
.
5) Separate Trading for Registered Interest and Principal of Securities
(STRIPS): Status
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As indicated in the Annual Policy Statement for 2009-10, the draft guidelines onstripping/reconstitution of government securities prepared in consultation with market participants were placed on the Reserve Bank’s website on May 14, 2009 for comments andfeedback. Taking into consideration the feedback received on the draft guidelines, the finalguidelines on stripping/reconstitution of government securities were issued on March 25,
2010. The guidelines, which came into effect from April 1, 2010, will enable market participants to strip/reconstitute eligible Government of India dated securities through thenegotiated dealing system (NDS) subject to certain terms and conditions.
6) Corporate Bond Market
To facilitate settlement of secondary market trades in corporate bonds on a delivery versus payment-1 (DVP-1) basis on the Real Time Gross Settlement (RTGS) system, the NationalSecurities Clearing Corporation Limited (NSCCL) and the Indian Clearing CorporationLimited (ICCL) have been permitted to maintain transitory pooling accounts with theReserve Bank. Further, guidelines have been issued to all Reserve Bank regulated entities to
mandatorily clear and settle all OTC trades in corporate bonds using the above arrangementwith effect from December 1, 2009. To facilitate the development of an active repo marketin corporate bonds, the guidelines for repo transactions in corporate debt securities wereissued on January 8, 2010. The guidelines, which came into force with effect from March 1,2010, will enable repo in listed corporate debt securities rated ‘AA’ or above. Fixed IncomeMoney Market and Derivatives Association of India (FIMMDA) is working on thedevelopment of reporting platform and also on the Global Master Repo Agreement tooperationalise the repo in corporate bonds.
7) Non-SLR Bonds of companies engaged in infrastructure: Valuation
At present, banks’ investments in non-SLR bonds are classified either under held for trading (HFT) or available for sale (AFS) category and subjected to ‘mark to market’requirements. Considering that the long-term bonds issued by companies engaged ininfrastructure activities are generally held by banks for a long period and not traded andalso with a view to incentivising banks to invest in such bonds, it is proposed:to allow banks to classify their investments in non-SLR bonds issued by companies engaged ininfrastructure activities and having a minimum residual maturity of seven years under theheld to maturity (HTM) category.
8) Investment in Unlisted Non-SLR Securities
investment in non-SLR debt securities (both primary and secondary market) by bankswhere the security is proposed to be listed on the Exchange may be considered asinvestment in listed security at the time of making investment.
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If such security, however, is not listed within the period specified, the same will bereckoned for the 10 per cent limit specified for unlisted non-SLR securities. In case suchinvestment included under unlisted non-SLR securities lead to a breach of the 10 per centlimit, the bank would not be allowed to make further investment in non-SLR securities(both primary and secondary market, including unrated bonds issued for financing
infrastructure activities) till such time the limit is reached.
SectionIV. Credit Delivery and Financial Inclusion
1. Credit Flow to the MSE Secto
To mandate banks not to insist on collateral security in case of loans up to Rs.10 lakh asagainst the present limit of Rs.5 lakh extended to all units of the micro and small enterprisessector. Banks are urged to keep in view the recommendations made by the Task Force andtake effective steps to increase the flow of credit to the MSE sector, particularly to microenterprises. The Reserve Bank will monitor the performance of banks in this regard.
2. Rural Co-operative Banks
Based on the recommendations of the Task Force on Revival of Rural Co-operative CreditInstitutions and in consultation with the state governments, the Government of India hadapproved a package for revival of the short-term rural co-operative credit structure. Asenvisaged in the package, so far 25 States have entered into Memoranda of Understandingwith the Government of India and the National Bank for Agriculture and RuralDevelopment. Fourteen States have made necessary amendments to their respective Co-operative Societies Acts. As on December 31, 2009, an aggregate amount of about Rs.7,000crore was released by the NABARD as Government of India’s share under the package to primary agricultural credit societies in 11 States.
3. Financial Inclusion Plan for Banks
With a view to increasing banking penetration and promoting financial inclusion, domesticcommercial banks, both in the public and private sectors, were advised to take somespecific actions. First, banks were required to put in place a Board-approved FinancialInclusion Plan in order to roll them out over the next three years and submit the same to theReserve Bank by March 2010. Banks were advised to devise FIPs congruent with their business strategy and to make it an integral part of their corporate plans. The Reserve Bank
has deliberately not imposed a uniform model so that each bank is able to build its ownstrategy in line with its business model and comparative advantage. Second, banks wererequired to include criteria on financial inclusion in the performance evaluation of their field staff. Third, banks were advised to draw up a roadmap by March 2010 to provide
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banking services in every village having a population of over 2,000. The Reserve Bank willdiscuss FIPs with individual banks and monitor their implementation.
4. Priority Sector Lending Certificates: Working Group
a Working Group on Introduction of Priority Sector Lending Certificates was constituted bythe Reserve Bank in November 2009 to examine the pros and cons of the recommendationmade by the Committee on Financial Sector Reforms to PSLCs and make suitablerecommendations on its introduction and their trading in the open market. In this context.To expand the terms of reference of the Working Group to also review the pros and cons of inclusion of bank lending to micro-finance institutions under priority sector lending. TheGroup is expected to submit its Report by end-June 2010.
5. Urban Co-operative Banks
Taking into account the systemic financial health of urban co-operative banks, it was
decided in 2004 not to set up any new UCBs. With a view to improving the financialsoundness of the UCB sector, memoranda of understanding were signed with all StateGovernments. Following the consolidation, the financial condition of the UCB sector hasimproved considerably and UCBs have also been allowed to enter into new areas of business. With a view to increasing the coverage of banking services amongst localcommunities, it is proposed:
6. Liberalisation of Off-site ATMs by UCBs
Under the extant policy of branch authorisation, UCBs, which are well-managed and meetthe regulatory criteria, are required to submit annual business plans, based on which centres
are allotted to them according to their choice for opening of branches. Centres where UCBsdesire to open off-site ATMs are also required to be included in their annual business plan.In order to further improve the banking infrastructure, it has been decided to liberalise theapproach to setting up of off-site ATMs by UCBs. Accordingly, it is proposed:
8.Customer Service
The issue of ‘treating customers fairly’ is assuming critical importance as the experienceshows that consumer’s interests are often not accorded full protection and properly attendedto. The Reserve Bank and the Banking Ombudsman’s offices have been receiving severalcomplaints regarding levying of excessive interest rates and charges on certain loans and
advances. The Reserve Bank has, over the years, undertaken a number of initiatives for ensuring fair treatment to customers. This has taken the form of both regulatory fiats as alsomoral suasion and class action. However, within the domain of necessary freedom to banksto choose the types of services to be offered to the customers and related costs, concerted
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efforts need to be made to further develop a credible and effective functional system of attending to customer complaints.
SectionV. Regulatory and Supervisory Measures for
Commercial Banks1) Strengthening the Resilience of the Banking Sector
In December 2009, the Basel Committee on Banking Supervision had issued twoconsultative documents for public comments. The document on ‘Strengthening theResilience of the Banking Sector’ contains proposals for raising the quality, consistency andtransparency of the capital base, enhancing risk coverage, prescribing leverage ratio andcontaining pro-cyclicality. The second document on ‘International Framework for LiquidityRisk Measurement Standards and Monitoring’ focuses on measures for further elevating theresilience of internationally active banks to liquidity stress across the globe as well as
increasing international harmonisation of liquidity risk supervision. The Basel Committee is presently undertaking a Quantitative Impact Study of these proposals. The QIS will formthe basis for calibrating reforms proposed in the above two documents to arrive at anappropriate level and quality of capital and liquidity. The fully calibrated set of standards isexpected to be developed by end-2010 with the aim of implementation by end of 2012. Tenlarge Indian banks are participating in the QIS.
2) Working Group on Valuation Adjustment and Treatment of Illiquid Positions
In the Second Quarter Review of October 2009, it was proposed to issue appropriateguidelines to banks for implementation of enhancements and revisions to Basel-II
framework finalised by the Basel Committee in July 2009. Accordingly, the Reserve Bank issued guidelines to banks in February 2010. These guidelines require banks to makespecified valuation adjustments for various risks/costs in their portfolios includingderivatives, which are subject to ‘mark to market’ requirement and also for illiquidity of these positions. These guidelines also permit banks to follow any recognisedmodels/methods for computing the amount of valuation adjustment. In order to ensure that aconsistent methodology is adopted by banks for the purpose, it is proposed:
3) Convergence of Indian Accounting Standards with International Financial
Reporting Standards
92. As part of the efforts to ensure convergence of the Indian Accounting Standards withthe International Financial Reporting Standards, the roadmap for banking companies andnon-banking financial companies has been finalised by the Ministry of Corporate Affairs inconsultation with the Reserve Bank. As per the roadmap, all scheduled commercial bankswill convert their opening balance sheet as at April 1, 2013 in compliance with the IFRS
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converged IASs. Considering the amount of work involved in the convergence process, it isexpected that banks and other entities concurrently initiate appropriate measures to upgradetheir skills, management information system and information technology capabilities tomanage the complexities and challenges of IFRSs. The implementation poses additionalchallenge as certain aspects of IFRSs, especially the standards on financial instruments, are
under review and would take some time before they are finalised. In order to facilitatesmooth migration to IFRSs, it is proposed:
4) Infrastructure Financing
With a view to meeting the increasing financing needs of infrastructure development, theReserve Bank has taken a number of measures to facilitate adequate flow of bank credit tothis sector. In order to give a further thrust to infrastructure financing by banks, somefurther measures are felt necessary. In terms of extant instructions, rights, licenses andauthorisations of borrowers, charged to banks as collateral in respect of project loans are noteligible for being reckoned as tangible security for the purpose of classifying an advance as
secured loan. As toll collection rights and annuities in the case of road/highway projectsconfer certain material benefits to lenders, Till June 2004, the Reserve Bank had prescribeda limit on banks’ unsecured exposures. infrastructure loan accounts classified as sub-standard will attract a provisioning of 15 per cent instead of the current prescription of 20 per cent. To avail of this benefit of lower provisioning, banks should have in place anappropriate mechanism to escrow the cash flows and also have a clear and legal first claimon such cash flows.
5) Presence of Foreign Banks
In February 2005, the Reserve Bank had released the ‘roadmap for presence of foreign
banks in India’ laying out a two-track and gradualist approach aimed at increasing theefficiency and stability of the banking sector in India. The first track was the consolidationof the domestic banking system, both in the private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronised manner. The roadmap wasdivided into two phases, the first phase spanning the period March 2005 – March 2009, andthe second phase beginning after a review of the experience gained in the first phase.
6) Licensing of New Banks
The Finance Minister, in his budget speech on February 26, 2010 announced that theReserve Bank was considering giving some additional banking licenses to private sector
players. NBFCs could also be considered, if they meet the Reserve Bank’s eligibilitycriteria. In line with the above announcement, it is proposed: Thereafter, detaileddiscussions will be held with all stakeholders on the discussion paper and guidelines will befinalised based on the feedback. All applications received in this regard would be referred to
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an external expert group for examination and recommendations to the Reserve Bank for granting licenses.
7) Introduction of Bank Holding Company (BHC)/Financial Holding Company
(FHC) in India
The Reserve Bank placed a Discussion Paper on Holding Companies in Banking Groupson its website in August 2007 for public comments. The feedback received on theDiscussion Paper underscored the need for introduction of bank holding companies,financial holding companies in India to ensure an orderly growth of financial conglomeratesand better insulation of a bank from the reputational and other risks of thesubsidiaries/affiliates within the group. The Committee on Financial Sector Assessment, inits report issued in March 2009, observed that given the lack of clarity in the existingstatutes relating to the regulation and supervision of financial holding companies, theholding company structure as prevalent in the US for financial conglomerates is notcurrently in use in India. The Committee noted that the absence of the holding company
structure in financial conglomerates exposes investors, depositors and the parent companyto risks, strains the parent company’s ability to fund its own core business and could restrictthe growth of the subsidiary business.
8) Conversion of Term Deposits, Daily Deposits or Recurring Deposits for
Reinvestment in Term Deposits
As per extant guidelines, banks should allow conversion of term deposits, daily deposits or recurring deposits to enable depositors to immediately reinvest the amount lying in theaforesaid deposits with the same bank in another term deposit. Banks are required to payinterest in respect of such term deposits without reducing the interest by way of penalty,
provided that the deposit remains with the bank after reinvestment for a period longer thanthe remaining period of the original contract. On a review of the extant regulatory normsand in order to facilitate better asset-liability management.
9) Cross-border Supervision
As indicated in the Mid-Term Review of October 2008, an Internal Working Groupexamined the legal position on cross-border supervision arrangements and also explored thefeasibility of executing memoranda of understanding with overseas supervisors. Subsequentto the submission of the recommendations of the Group, the Reserve Bank hascomprehensively reviewed its existing practices for cross-border supervisory co-operation.
With a view to ensuring effective cross-border supervision and supervisory co-operation.
10) Information Technology and Related Issues: Enhancement to the
Guidelines
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Information technology) risk assessment and management are required to be made a part of the risk management framework of a bank, while internal audit/information system auditneeds to independently provide assurance that the IT-related processes and controls areworking as intended. Given the increased incidents of cyber frauds in banks in the recent period, it is necessary to improve controls and examine the need for a pro-active fraud risk
assessment and management processes in commercial banks. With the increase intransactions in electronic mode, it is also critical to examine the legal implications for banksarising out of IT-related legislations and other legislations such as IT Act 2000, ITAmendment Act 2008 and Prevention of Money Laundering Act, 2002 and also steps thatare required to be taken to suitably mitigate the legal risks arising from such transactions.
11) Credit Information Companies: Grant of Certificate of Registration
In April 2009, the Reserve Bank had issued in-principle approval to four entities to set up
credit information companies. Out of the four companies, Experian Credit InformationCompany of India Private Ltd. and Equifax Credit Information Services Private Ltd. have been granted Certificate of Registration to commence the business of credit information onFebruary 17, 2010 and March 26, 2010, respectively.
SectionVI. Institutional Developments
1) Non-Banking Financial Companies
A. Core Investment Companies (CICs): Regulatory Framework
The regulatory framework for NBFCs has evolved in the recent past with particular focuson inter-connectedness and systemic risk. Under this approach, access to public funds has been perceived as a systemic issue necessitating close regulation and monitoring of NBFCs,including systemically important non- deposit taking NBFCs However, companies whichhave their assets predominantly as investments in shares not for trading but for holdingstakes in group companies and also do not carry on any other financial activity justifiablydeserve a differential treatment in the regulatory prescription applicable to NBFCs-ND-SI.In order to rationalise the policy approach for CICs, and based on feedback received fromsuch companies, it is proposed to:treat CICs having an asset size of Rs.100 crore and aboveas systemically important core investment companies. Such companies will be required toregister with the Reserve Bank.
B. Securitisation Companies/Reconstruction Companies set up under the
SARFAESI Act, 2002: Changes in Regulations
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SCs/RCs can acquire the assets either in their own books or directly in the books of the trusts set up by them.The period for realisation of assets acquired by SCs/RCscan be extended from five years to eight years by their Boards of Directors, subjectto certain conditions. Asset/Security Receipts, which remain unresolved/notredeemed as at the end of five years or eight years, as the case may be, will
henceforth be treated as loss assets.It will be mandatory for SCs/RCs to invest anamount not less than 5 per cent of each class of SRs issued under a particular scheme and continue to hold the investments till the time all the SRs issued under that class are redeemed completely.With a view to bringing transparency and marketdiscipline in the functioning of SCs/RCs, additional disclosures relating to assetsrealised during the year, value of financial assets unresolved as at the end of theyear, value of SRs pending redemption, among others, are being prescribed.
2) Payment and Settlement Systems
i. Payment System Vision Document 2009-12
Keeping in view the significant developments in payment systems and the Reserve Bank’sresponsibility with regard to regulation and supervision of payment systems, the ‘VisionDocument’ for the period 2009-12 was released on February 16, 2010. The scope of the‘Vision Document’ has been enhanced to ensure that all the payment and settlementsystems operating in the country are safe, secure, sound, efficient, accessible andauthorised.
ii. Membership to the Committee on Payment and Settlement Systems
The Committee on Payment and Settlement Systems (CPSS), constituted under the aegis of
the Bank for International Settlements (BIS), was recently broadened to include India andalso nine other countries as members. The Reserve Bank is also represented on threeWorking Groups of the CPSS set up for drawing up standards/guidelines towards efficientfunctioning of the payment and settlement systems and supporting market infrastructureacross the world.
iii. Standardisation of Security Features on Cheque Forms
Cheques continue to be a predominant instrument for retail payments. To act as a deterrentto cheque frauds and to bring about uniformity across cheques issued/used by the bankingindustry, it was decided to examine the need for standardisation of security features on
cheque forms. A Working Group was accordingly constituted and based on itsrecommendations and the industry’s feedback, cheque truncation system (CTS)–2010Standard with benchmark specifications for security features on cheques and field placements on cheque forms has been prescribed.
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iv. Operationalisation of National Payments Corporation of India
The National Payments Corporation of India, set up in December 2008 as an umbrellaorganisation for operating and managing retail payment systems, has the envisioned role tolook at future innovations in the retail payment space in the country. Effective December
14, 2009, NPCI has taken over operations of the National Financial Switch from Institutefor Development and Research in Banking Technology. NPCI is also expected to take thelead role in rolling out the proposed CTS project at Chennai.
v. Phased Discontinuation of High Value Clearing
It has been the endeavour of the Reserve Bank to migrate from paper-based payments toelectronic payment systems by creating the appropriate technological infrastructure. As astep towards encouraging migration of paper-based high value payments to more secureelectronic modes, it was decided to discontinue high value clearing in a phased and non-disruptive manner by March 31, 2010. This process has been completed as per schedule.
vi. Enhancements in National Electronic Funds Transfer System
To further strengthen the National Electronic Funds Transfer system in terms of availability, convenience, efficiency and speed, significant enhancements were introducedin the operational procedures and process flow, effective March 1, 2010. These included: (i)increasing the operating window by two hours on weekdays and one hour on Saturdays; (ii)introducing the concept of hourly settlements; (iii) shortening the time window for return of uncredited transactions; and (iv) enabling positive confirmation to the remitter throughSMS or e-mail about the time and date of actual credit of funds to the beneficiary’s accountwith the destination bank. The concept of positive confirmation to the remitter is perhaps
unique across all retail electronic payment systems world-wide.As at end-March 2010,over 66,500 branches of 95 banks had participated in NEFT and the volume of
transactions processed increased with a record volume of 8.3 million transactions in
March 2010.
vii. Mobile Banking in India
The use of mobile phone channels for initiation and execution of banking transactions has been gaining significance the world over. The significance of this channel has beenrecognised by the Reserve Bank. Accordingly, regulatory guidelines for enabling mobile banking were notified in October 2008. The transaction limits were further relaxed in
December 2009. Banks were also permitted to enable small value transactions up toRs.1,000 without end-to-end encryption. Currently, this channel is used to settle on anaverage 1.9 lakh transactions of average value 12 crore in a month. To further encourage thedevelopment of other mobile-based products, non-bank entities were also permitted in
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August 2009 to issue mobile-based, semi-closed prepaid payment instruments, up toRs.5,000.
(3.1) Conclusion & findings
Governments spend money on a wide variety of things, from the military and police to
services like education and healthcare, as well as transfer payments such as welfare benefits
Keynesian economics suggests that increasing government spending and decreasing tax
rates are the best ways to stimulate aggregate demand. This can be used in times of
recession or low economic activity as an essential tool for building the framework for strong
economic growth and working towards full employment
One of the biggest obstacles facing policymakers is deciding how much
involvement the government should have in the economy. Indeed, there have been
various degrees of interference by the government over the years. But for the most
part, it is accepted that a degree of government involvement is necessary to sustain avibrant economy, on which the economic well being of the population depends.
Monetary policy is the management of money supply and interest rates by central
banks to influence prices and employment. Monetary policy works through
expansion or contraction of investment and consumption expenditure.
Monetary policy cannot change long-term trend growth.
There is no long-term tradeoff between growth and inflation. (Highinflation can
only hurt growth).
What monetary policy – at its best – can deliver is low and stableinflation, and
thereby reduce the volatility of the business cycle. When inflationary pressures build up: raise the short-term interest rate (the policy
rate) which raises real rates across the economy which squeezes consumption and
investment.
The pain is not concentrated at a few points, as is the case withgovernment
interventions in commodity markets.
Monetary policy is supposed to be about pinning down the shortrate so as to achieve
an inflation target, and thus stabilise themacroeconomy
Expected Outcomes
(i) Inflation will be contained and inflationary expectations will be anchored.
(ii) The recovery process will be sustained.
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(iii) Government borrowing requirements and the private credit demand will be met.
(iv) Policy instruments will be further aligned in a manner consistent with the
evolving state of the economy.
(4.1) Bibliography
Heyne, P. T., Boettke, P. J., Prychitko, D. L. (2002): The Economic Way of Thinking (10th ed). Prentice Hall.
Larch, M. and J. Nogueira Martins (2009): Fiscal Policy Making in the EuropeanUnion - An Assessment of Current Practice and Challenges. Routledge.
• http://www.econlib.org/library/Enc/FiscalPolicy.html•
http://dictionary.reference.com/browse/straitjacket• http://www.federalreserve.gov/policy.htm.• http://www.econjournalwatch.org/pdf/ForderComment1December2004.pdf .• http://www.federalreserve.gov/generalinfo/fract/
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THANK S