Situational Analysis In Last decade, India experienced exceptional growth of 9%, which was followed by a slowdown initiated by the

global financial crisis in 2008 due to this all emerging economies experienced slowdown, India was no exception. At the same time India suffered from consistently high inflation rate which bring double whammy for India.
(http://articles.economictimes.indiatimes.com/2014-01-03/news/45836978_1_rural-india-pm-manmohan-singhgrowth-momentum) (http://www.tradingeconomics.com/india/inflation-cpi)

Past data shows India had consistently more than 6% inflation rate, peaks at 11%. India which has 9% growth rate in 2008-2009, its GDP growth rate has shrunk to below 5% in current financial year.

So Economist faces two problems at the same time. 1. They need to counter the inflation. 2. Increase GDP growth rate.

Countering the Inflation Inflation The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. From 2004, India has consistently above 4% rate of Inflation but effect of inflation are covered by high GDP growth rate, but now India GDP growth rate stand at 5%, Inflation causing havoc in general people who already play important role in routing Congress in State Assembly Election. To control Inflation RBI uses Monetary Policy Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. Monetary Policy of India is formulated and executed by Reserve Bank of India. Monetary policy primary function involves firstly supply of money, secondly cost of money or rate of interest and thirdly availability of money to achieve specific objectives. These functions results into control over Inflation, as Money Supply at particular time control inflation. Objectives of Monetary policies are Maintaining price stability Ensuring adequate flow of credit to the productive Sectors of the economy to support economic growth Rapid economic growth Balance of payment equilibrium Full employment Equal income distribution

The RBI aims to achieve these objectives of economic growth and control through these methods: 1. Quantitative/General Methods These methods maintain and control the total quantity or volume of credit or money supply in the economy. 1. Open Market Operations Open market operations indicate the buying/ selling of govt. securities in the open market to balance the money supply in the economy

2. Deployment of Credit The RBI has taken various measures to deploy credit in different sector of the economy. The certain %age of the bank credit has been fixed for various sectors like agriculture, export etc.

3. Cash reserve ratio (CRR) Cash reserve ratio refers to that portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves. The money supply in the economy is influenced by CRR. It is the ratio of a banks time and demand liabilities to be kept in reserve with the RBI. The RBI is authorized to vary the CRR between 3% and 15%. 4. Statutory liquidity ratio (SLR) It refers to that portion of deposits with the banks which it has to keep with itself as liquid assets (Gold, approved govt. securities etc.) If RBI wishes to control credit and discourage credit it would increase CRR & SLR. Under SLR, banks have to invest a certain percentage of its time and demand liabilities in govt. approved securities. The reduction in SLR enhances the liquidity of commercial banks.

2. Qualitative/Selective Measures The RBI directs commercial banks to meet their social obligations through selective/ qualitative measures.

These measures control the distribution and direction of credit to various sectors of the economy. (http://www.dnb.nl/en/about-dnb/duties/monetary-policy/)

Interest rate A rate increase will push prices down, or at least rein in rising prices. A rate cut will make prices go up faster. An increased interest rate means that it will cost more to borrow money, and people will have less money left to spend. As a result, the economy will slow down and so will price increases. However, since it may take several months for a rate change to work its way through into prices, the effect is not always clearly visible.

Open market operation During inflation, the central bank sells govt. securities and price bonds in the open market in order to contract the supply of money.

Credit Rationing: An action taken by lending institutions to limit or deny credit based on borrowers' creditworthiness and an overload of loan demands. Interest rates trending either up or down can lead to credit rationing. An example of credit rationing is raising interest rates about current market rates When there is inflationary pressure, the state bank adopts the policy of credit rationing..

Declining Investments But at the same time Government also need to monitor GDP growth, increasing interest rate will make investment decision costly and overall decrease the GDP of country. In recent months decline in growth rate is predominantly due to decline in Investment. Investments are declined from 39% in pre-crisis level to 29% in 2012. So further increase in investment will further dampen investment opportunity and will cause GDP growth rate to shrink. Due to this after two round of increase in interest rate, RBI surprized everyone in December by not increasing Interest Rate. Most Ratio remain unchanged for this quarterly monetary review.

(http://timesofindia.indiatimes.com/business/india-business/RBI-governor-Rajansurprises-everyone-yet-again-leaves-key-ratesunchanged/articleshow/27574586.cms)