Monetary Policy of India is formulated and executed by reserve bank of India to achieve specific objectives.

The monetary policy is defined as discretionary act undertaken by the authorities designed to influence (A) the supply of money (B) cost of money or rate of interest (C) the availability of money for achieving specific objectives

The main elements of monitory policy are

(1) It regulates stock and growth rate of money supply

(2) It regulates the entire banking system of the economy

(3) It regulates the level an structure of interest rates directly in organised sector and indirectly in unorganised sector

(4) It determines the allocation of loans among different sectors

CD Deshmukh The First Indian Governor ofReserve Bank of India (RBI)

Dr. D. SubbaraoPresent Governor of RBI

OBJECTIVES OF MONETARY POLICY

Full employment

To attain price Stability

To Promote economic growth

To attain exchange stability

To Promote saving and investment

To Control Trade cycle

To Promote Employment

To Regulate Money Supply In Economy

INSTRUMENTS OF MONETARY POLICY

Bank Rate

Statutory Liquidity Ratio

Open Market Operations

Cash Reserve Ratio

Repurchase Auction Rate(Repo) and Reverse Repurchase Auction Rate (Reverse Repo)

Margin Requirement

Credit Ceiling

Direct Action

Moral Persuasion

• Bank Rate is also known as discount rate. It is the rate at which RBI lends to the commercial banks or rediscounts their bills. If bank rate is increased ,then commercial banks also charge higher rate of interest on loans given by banks to public because now commercial banks get funds from RBI at higher rate of interest. Higher rate of interest will contract credit in the economy i.e. public will take lesser loans because of higher rate of interest. The current bank rate is 10.25%

DATE Bank Rate DATE Bank Rate

DATE Bank Rate

15 - July 2013 10.25 2-Mar-1999 8.00 9-Jan-1971 6.00

03 - May 2013 8.25 29-Apr-1998 9.00 2-Mar-1968 5.00

19 - March 2013 8.50 3-Apr-1998 10.00 17-Feb-1965 6.00

29- January -2013 8.75 19-Mar-1998 10.50 26-Sep-1964 5.00

17-April-2012 9.00 17-Jan-1998 11.00 3-Jan-1963 4.50

13-Feb-2012 9.50 22-Oct-1997 9.00 16-May-1957 4.00

29-Apr-2003 6.00 26-Jun-1997 10.00 15-Nov-1951 3.50

30-Oct-2002 6.25 16-Apr-1997 11.00 28-Nov-1935 3.00

23-Oct-2001 6.50 9-Oct-1991 12.00 5-Jul-1935 3.50

2-Mar-2001 7.00 4-Jul-1991 11.00 2-Jan-1900 1.00

17-Feb-2001 7.50 12-Jul-1981 10.00

22-Jul-2000 8.00 23-Jul-1974 9.00

2-Apr-2000 7.00 31-May-1973 7.00

Past Record of Bank Rate

• It means a certain percentage of deposits is to be kept by banks in form of liquid assets. This is kept by bank itself the liquid assets here include government securities, treasury bills and other securities notified by RBI. If SLR is more then banks have to keep more part of deposits in specified securities and banks will have less surplus funds for granting loans. It will contract credit.SLR is fixed by RBI and usually it has been ranging between 24% to 39%.The current SLR is 23%.

• It means that the bank controls the flow of credit through the sale and purchase of securities in the open market. When securities are purchased by central bank, then RBI makes payment to commercial banks and public. So, the public and commercial banks now have more money with them. It increases money supply with commercial banks and public. This will expand credit in the economy. In year 2012-13 RBI Purchases securities 8,000 crore

• Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of January 2013, the CRR is 4.00 percent

• 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. As of August 2013, the repo rate is 7.25 % and reverse repo rate is 6.25

• Margin is the difference between loan value and market value of security. It is fixed by RBI. For different types of loans, margin requirement is different .If margin % is more, then less loan will be given for a certain value of security and vice versa. E.g. if margin requirement is 20% then bank will give maximum 80% of the market value of security as loan. For priority sector, margin requirement is less and in areas where credit is to be contracted margin requirement is increased.

Reserve bank can also exercise moral influence upon the members banks with a view to pursue its monetary policy. RBI convinces banks to curb loan to unproductive sectors. From time to time reserve bank holds meetings with the member banks seeking their cooperation in effectively controlling the monetary system of the country. It advices them to extend more credit to priority sector.

• According to 1949 act, Reserve bank can stop any commercial bank from any type of transaction. In case of defiance of the orders of reserve bank, it can resort to direct action against the member bank. It can stop giving loans and even recommend the closure of the member bank to the central government under pressing circumstances.

• In this operation RBI issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors. Few example of ceiling are agriculture sector advances, priority sector lending.

LIMITATIONS OF MONETARY

POLICY MEASURES

Poor Banking Habit

Underdeveloped Money Market

Existence Of Black Money

Conflicting Objectives

Lack Of Coordination With Fiscal Policy

Lack Of Banking Facilities

Limitations of Monetary Instruments

Monetary policy 2013-14

• RBI's first-quarter monetary policy • Repo rate unchanged at 7.25%. • The Reverse Repo Rate stood at 6.25% • Marginal Standing Facility (MSF) and Bank Rate stood at

10.25%• Cash reserve ratio too unchanged at 4 percent• Cuts GDP forecast for FY'14 to 5.5 percent from 5.7 percent

earlier• Next mid-quarter review of policy on September 18; second

quarter policy review on October 29.• This is RBI Governor D Subbarao's last policy before expiry of

his five year term.

• Fiscal policy is related to income and expenditure of the government. It is an instrument for promoting economic growth, employment, social welfare etc. Fiscal policy means any decision to change the level, composition or timing of government or to change the rate and structure of tax. The objectives of fiscal policy is same as of monetary policy.

INSTRUMENTS OF FISCAL POLICY

Public Expenditure

Taxation Policy

Public Debt

Deficit Financing

Public expenditure influences the economic activities of country very much. Public expenditure may be of two kinds i.e. developmental and non developmental. Expenditure on developmental activities requires huge amount of capital. So much capital cannot be made available by private sector alone. It requires substantial increase in public expenditure. Public expenditure may be made in many ways (1) Development of state enterprises (2) support to private sector (3) Develpoment of infrastructure (4) Social Welfare.

• Taxes are the main source of revenue of government. Government levies both direct and indirect taxes in India. Direct taxes are those which are directly paid by the assesses to the government i.e. income tax, wealth tax etc. Indirect tax are paid indirectly by the public to the government i.e. excise duty, custom duty, VAT etc. Direct tax are progressive in nature. Indirect tax are not progressive. These change from all the segments of society at same rate. The main objectives of taxation policy are:

(1) Mobilisation of resources

(2) To promote saving

(3) To promote saving

(4) To bring Equality of income and wealth

• Government needs lot of funds for economic development of the country. No government can mobilise so much funds by way of tax alone. It is therefore , becomes inevitable for the government to mobilise resources for economic development by resorting the public debt. Public debt is obtained from two kinds

• (1) Internal Debt• (2) External Debt

Public Debt Of current year (In crores of Rupees)

As on 31st March 2013 As on 31st March 2014

Internal debt 48,66,829.00 54,68,622.11

External debt 1,72,302.01 1,82,862.11

Total 50,39,131.01 56,51,484.22

Deficit Financing refers to financing the budgetary deficit. Budgetary deficit here means excess of government expenditure over government income. It means “Taking loans from reserve bank of India by the government to meet the budgetary deficit” . Reserve bank gives loans buy issuing new currency notes. Increase in money supply leads to fall in value of money. Fall in value of money in turn leads to increase in price level. So deficit financing should be kept low as it leads to price rise in economy. Thus due to deficit financing necessary funds are made available for economic Growth and on the other inflation of country increases.

Limitations Of Fiscal Policy

Lack Of accurate Forecasting

Delay in Decision

Poor Tax Administration

Inequality Of income

Failure in Public Sector

Increasing Interest Burden

Fiscal policy 2013-14

• Total Expenditure 16,65,297 • Revenue Expenditure 14,36,168 • Capital Expenditure 2,29,129 • Plan Expenditure at ` 5,55,322 crore. • Fiscal deficit for the current year contained at 5.2 per cent and for the

year 2013-14 at 4.8 per cent.• Revenue deficit for the current year at 3.9 per cent and for the year 2013-

14 at 3.3 per cent.• By 2016-17 fiscal deficit to be brought down to 3 per cent, revenue

deficit to 1.5 per cent and effective revenue deficit to zero %• No change in the normal rates of 12 percent for excise duty and service

tax.• No case to revise either the slabs or the rates of Personal Income Tax.

Even a moderate increase in the threshold exemption will put hundreds of thousands of Tax Payers outside Tax Net