India Monetary Policy

Every country has some type of monetary policy and while the concept is the same, the components of the policy vary.  The India Monetary Policy was actually developed during the 1990s as a means of lowering the annual inflation rate, as well as providing credit support specifically for production.  The result was the money supply for India being dramatically reduced, primarily due to bank deposits growing slow and reserve money starting to decline in growth.

Every country has some type of monetary policy and while the concept is the same, the components of the policy vary.  The India Monetary Policy was actually developed during the 1990s as a means of lowering the annual inflation rate, as well as providing credit support specifically for production.  The result was the money supply for India being dramatically reduced, primarily due to bank deposits growing slow and reserve money starting to decline in growth.

In addition, India’s government wanted to control growth by reducing the amount of inflows for foreign exchange.  With this, monetary growth slowed down along with lower bank credit designed to help the commercial sectors.  However, when other financial sources to the industry were reduced, such as GDR issues for Euro markets and domestic stock market, the trends were impacted even more.

Another reason India Monetary Policy was needed had to do with funds from capital markets being raised experiencing decline.  In addition, the amount of raised money through loans backed by the Euro dropped by almost 70% during this same time.  While this occurred, the government was still borrowing significant levels for the over budget fiscal deficit used to keep money markets controlled.  With all this going on, interest rates in India felt tremendous pressure.

Although inflation began to drop in India, real rates that the industry sector was facing were still high.  Even the prime lending rate offered by most India banks was extremely high, hitting 16.5%.  Another reason for the India Monetary Policy was the RBI reducing cash reserves for banks by one percentage point.  This then caused bank deposit interest rates to loosen and minimum term for deposits was reduced from 46 to 30 days.  Additionally, a refinancing facility for bank investments specific to government securities was withdrawn.  All of this combined helped the equivalent of United States dollars of $1.2 billion associated with the banking and finance sector.

Although a number of industry and financial sources in India were happy to see changes for liquidity, concern remained that the strict and high lending rates would linger and the government would start to take over new bank liquidity through increased government borrowing.  By 1998, the India Monetary Policy focused on credit with the intention of accelerating investment and output for the industry sector.  Anticipation was the policy would also help control inflation, keep reforms going for the financial sector, and lower interest rates for commercial borrowers.  The result was the prime lending rate being lowered to 13% and leaving the Cash Reserve Ratio alone.

With the new India Monetary Policy in place, investments up to 30% of assets in treasure bills were allowed.  This new policy also meant that banks had the liberty to set   penalties anytime someone withdrew deposits prematurely.  Another aspect of the India Monetary Policy was the RBI adopting several changes to keep the country’s currency from losing value.  In fact, the outcome was currency appreciating.  Some of the changes included an increase in the bank cash reserve, as well as bank rate.  Soon, the India Rupee stabilized at which time rollback of the bank rate occurred, putting the new rate at 10%.