Monetary Nd Fiscal Policy1

7/30/2019 Monetary Nd Fiscal Policy1

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MEANING

Monetary policy is an instrument which effect

the credit flow in an economy.

Monetary policy is the process by which

monetary authority of a country, generally a

central bank controls the supply of money in

the economy by exercising its control over

interest rates in order to maintain pricestability and achieve high economic growth



Objectives• Price Stability: implies promoting economic development with considerable

emphasis on price stability. The centre of focus is to facilitate the environment

which is favourable to the architecture that enables the developmental projectsto run swiftly while also maintaining reasonable price stability.

• Controlled Expansion Of Bank Credit :One of the important functions of RBI is

the controlled expansion of bank credit and money supply with special attention

to seasonal requirement for credit without affecting the output.

• Desired Distribution of Credit: Monetary authority has control over the decisions

regarding the allocation of credit to priority sector and small borrowers. This

policy decides over the specified percentage of credit that is to be allocated to

priority sector and small borrowers.

• Equitable Distribution of Credit :The policy of Reserve Bank aims equitable

distribution to all sectors of the economy and all social and economic class of people

• To Promote Efficiency It is another essential aspect where the central banks pay

a lot of attention. It tries to increase the efficiency in the financial system and

tries to incorporate structural changes such as deregulating interest rates, ease

operational constraints in the credit delivery system, to introduce new moneymarket instruments etc.



INSTRUMENTS

GENERAL (QUANTITATIVE) Methods

SELECTIVE (QUALITATIVE) Methods



GENERAL (QUANTITATIVE) Methods

Meaning:-

These methods help in credit control in theeconomy.

Affect total quantity of the credit.



Types

A. Bank rate policy

B. Open market policy

C. Cash reserve ratio

D. Statutory Liquidity ratio



Bank Rate policy

Traditional approach:- Bank rate means on

which central bank discounts and rediscount

the eligible bills.

Today’s approach:- Bank rate means the

minimum rate on which central bank provides

financial accommodation to commercial bank

in the discharge of its function as the lender of the last resort.



Repo Rate and Reverse Repo Rate

• Repo Rate and Reverse Repo Rate :Repo rate is the rate at which RBI lends

to commercial banks generally against government securities. Reduction

in Repo rate helps the commercial banks to get money at a cheaper rate

and increase in Repo rate discourages the commercial banks to get money

as the rate increases and becomes expensive. Reverse Repo rate is the

rate at which RBI borrows money from the commercial banks. The

increase in the Repo rate will increase the cost of borrowing and lending

of the banks which will discourage the public to borrow money and will

encourage them to deposit. As the rates are high the availability of credit

and demand decreases resulting to decrease in inflation . This increase in

Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy.



Effect of Bank rate

Increase in bank rate

Increase in bank rate charge by

the central bank on its

advance to commercial bank.

Commercial bank increase the

rate of interest on their loan.

Demand for the credits and

loan decrease.

Flow of the money decrease in

the economy

Use in inflationary situation

Decrease in bank rate

Decrease in bank rate charge

by the central bank on its

advance to commercial bank.

Commercial bank decrease the

rate of interest on their loan.

Demand for the credits and

loan increase.

Flow of the money increase in

the economy

Use in depression situation



Open Market operation

Its include the sales and purchase by the central

bank of ….

Assets

Foreign exchange

Gold

Government securitiesCompany securities



Use of Open Market operation

In the inflationary situation

Central bank decrease the

money supply.

Central bank sale out thesecurities to commercial

bank and control money

supply.

In the depressionary situation

Central bank increase the

money supply.

Central bank purchase thesecurities from the

commercial bank.



Cash Reserve Ratio

Commercial bank has to keep a certain

percentage of its deposits with central bank.

It control the cash flow in economy.

It keeps changes in monetary policy framedby central bank of a country.



STATUTORY LIQUIDITY RATIO

Commercial bank is to keep a certain

percentage of its deposit as liquid asset.

It control the cash flow in economy.

It keeps changes in monetary policy framedby central bank of a country.



Use of C.R.R. & S.L.R

In Inflationary situation

o Increased the percentage of

cash reserve ratio and

Statutory liquidity ratioo It reduces the supply of

money in an economy

In Depressionary situation

o Decreased the percentage

of cash reserve ratio and

Statutory liquidity ratioo It increases the supply of

money in an economy



Function of credit regulation the

quantitative methods

For expansion of credit

Reduce the bank rate

Purchase of securities

Reduce the C.R.R.

Reduce the S.L.R.

For contraction of credit

Increase the bank rate

sales of securities

Increase the C.R.R.

Increase the S.L.R.



Specific or qualitative Credit Control

Adopt for expansion and contraction of creditto attain specific objective.



Methods of qualitative credit control

• Prescription of margin requirements: While

giving loans commercial banks against stock or

securities it keeps margin.

• Consumer credit regulation: Credit made

available by CB’s for purchase of consumerdurables

• Direct action: when CB’s does not cooperate

with central bank

• Moral Suasion: means persuasion and

request.



Types of Monetary Policy

• An expansionary monetary policy (e.g.,

decrease in interest rates) increases the supply

of money. An expansionary monetary policy

might be used during a recession to encourage

banks to extend credit to consumers and

entrepreneurs. A contractionary monetary

policy (e.g., increase in interest rates) wouldconversely shrink the money supply, and might

be used to prevent or control inflation during a

period of economic growth



• Rates (%) w.e.f.

• Bank Rate 9.50% 13.02.2012

• Repo Rate 8.50% 25.10.2011

• Rev. Repo Rate 7.50% 25.10.2011

• C R R 4.75% 09.03.2012

• S L R 24.00% 18.12.2010





MEANING

• The fiscal policy is concerned with the raising of government revenue and incurring of governmentexpenditure. To generate revenue and to incurexpenditure, the government frames a policy called

budgetary policy or fiscal policy. So, the fiscal policy isconcerned with government expenditure andgovernment revenue.

• In short, fiscal policy or budgetary policy consists of steps & measures which the government in order tofulfill the aims of economic policy.



Objective of fiscal policy

To achieve and maintain the full employment

in the economy.

Attain Economic growth in long term.

Achieve economic stability.

To guide the allocation of existing resources

into socially necessary lines of development.



INSTRUMENTS

PUBLIC EXPENDITURE

TAXATION

PUBLIC DEBT



PUBLIC EXPENDITURE Meaning:- There are large number of public expenditure like

opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects

govt has paid large amount for purchasing and paying wages

and salaries all these expenditure are paid after making govt.

expenditure policy . Govt. can increase or decrease the amount

of public expenditure by changing govt. budget . So , govt.

expenditure is technique of fiscal policy by using this , govt. use

his fund first on very necessary sector and other will be done

after this .

Government spending

Productive

Non-Productive



Types

PUMP PRIMING

The government spending

which will have the effect of

setting the economy goingon the way towards full

utilization of resources.

Example:- Gov Expenditure,

building infrastructure etc.

COMPENSATORY SPENDING

The government spending

which will have the effect of

setting the social objective

and payment of interest on

debt.

Example:- schools,

hospitals, pensions, relief

payments etc.



EFFECT

• Gov. exp should be reduced in inflation and

increased during depressions in case of a

deflationary situation in an economy.

Therefore it act as a balancing factor betweensaving & investment



TAXATION

Meaning:- Taxation policy is relating to new amendments in

direct tax and indirect tax . Govt. of India passes finance bill

every year . In this policy govt. determines the rate of taxes .

Govt. can increase or decrease these tax rates and amend

previous rules of taxation .Govt.'s earning's main source istaxation . But more tax on public will adverse effect on the

development of economy.

Source of Revenue

Helps Gov. to do there exp.

Generated from public



Types of Tax

Direct Tax

• Direct tax are those tax

which a person pay to

government directly forhimself and can not enforce

on other.

• For example:- income tax,

wealth tax etc.

Indirect tax

• Indirect tax are those tax

which a person can on

others.• For example:- service tax,

sales tax.



Effect of Taxation

Reduction in taxation

Increase the disposable

income.

Increase the consumptionpower.

Use for offsetting the

deflation forces

Increase in Taxation

Decrease the disposable

income.

Decrease the consumptionpower.

Use for offsetting the

inflation forces.



Public Debt

When Gov. exp. are more then Gov. revenueGovernment take Public Debt.

Deficit financing = Gov. exp. – Gov. revenue.

If Govt. thinks that deficit financing is notsufficient for fulfilling the public expenditure or if

govt. does not use deficit financing , then govt.

can take loan from world bank , or take loanfrom public by issuing govt. securities and bonds

Government take the public debt to fulfill the

gap between the Gov exp and the revenue.



Types of public debt

Borrowing from public

Borrowing from commercial bank

Issue of new currency



Effect

• Public Debt effect the inflation and deflation

• If government take the borrowing from public

and banks it will decrease the cash flow in the

market and increase the deflation.

• If there is depression in economy government

repay the debt the public which increase the

cash flow of the money in market.



Limitation of Fiscal Policy 1. After issuing new notes for payment of govt. of expenses , inflation of India is

increasing rapidly and in this inflation , prices of necessary goods are increasing

very fastly. Living of poor person has become difficult . So , these sign shows the

failure of Indian fiscal policy.

2. Govt. fiscal policy has failed to reduce the black money . Even large amount

of past minister is in the form of black money which is deposited in Swiss Bank.

3. After taking loan from world bank under the fiscal policy's debt technique , govt.

has to obey the rules and regulations of world bank and IMF . These rules are

more harmful for developing small domestic business of India.

4. After expending large amount for generating new employment under fiscal policy, rate of unemployment is increasing fastly and big lines on govt. employment

exchange can be seen generally in working days . Database of employment

exchanges are full from educated unemployed candidates .



Some facts and figures

Monetary policy is been framed by……………

Fiscal policy is been framed by………………

Present governor of R.B.I……………………

Present Finance minister of India……………….

Current S.L.R…………………….

Current C.R.R…………………..

Monetary policy in India framed under whichact……………………….

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Monetary Nd Fiscal Policy1