Rajeev Chandrasekhar's official website - Member of Parliament

GOVERNMENT OF INDIA

Ministry of Finance

DEPARTMENT OF FINANCIAL SERVICES

RAJYASABHA
UNSTARRED QUESTION NO, 1690
TO BE ANSWERED ON THE 10TH AUGUST, 2010 I SHRAVANA 19, 1932 (SAKA)
Impact of Current Monetary Policy

 

1690. SHRI RAJEEV CHANDRASEKHAR:
Will the Minister of FINANCE be pleased to state:

(a) whether Government is aware of the effect of the current monetary policy of low interest rates and liquidity, on creation of asset bubbles; and

(b) if so, the steps being taken by Government to ensure that no asset bubbles are being created and there is no disruptive effect of correction of these asset bubbles on the banking system?

ANSWER
The Minister of State in the Ministry of Finance
(Shri Namo Narain Meena)

(a) & (b): The Reserve Bank of India (RBI) followed an accommodative monetary policy stance beginning mid-September 2008, by reducing its policy rates (repo and reverse repo rate) and injecting liquidity into the system to mitigate the adverse impact of the global financial crisis on the Indian economy. Various measures initiated played a crucial role in instilling confidence among market participants and in ensuring that the economy recovered as early as possible.

However, in view of the rising inflation and the risk of it impinging on inflationary expectations, RBI began the process of exit from the expansionary monetary policy beginning October 2009. One of the reasons for beginning the reversal of monetary easing was to avoid any potential asset price build up arising from the large amount of liquidity in the system. The exit policy began with the termination of some sector-specific facilities (such as the special refinance facility and the term repo facility) and restoration of the statutory liquidity ratio (SLR) of scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October 2009. The provisioning requirement for advances to the commercial real estate sector classified as 'standard assets' was also raised from 0.4 per cent to 1.0 per cent.

Since January 2010, continuing the process of exit, the Reserve Bank has so far cumulatively raised the CRR by 1 per cent to 6.0 % of scheduled bank's net demand and time liabilities (NDTL), thereby absorbing Rs. 48,500 crore of surplus liquidity. The repo rate has been increased by 100 basis points to 5.75% and reverse repo rate has been increased by 125 basis points to 4.5% during 2010.