VISHAL SINGHARJUN CHAHUANAKASH SHARMANITIN TYAGI

MONETARY POLICYMEANING Monetary policy refers to the steps taken by the RBI to regulate the cost & supply of money & credit in order to achieve the socio-economic objectives of the economy. Monetary policy influences the supply of money, the cost of money or the rate of interest and the availability of money.

DEFINITION OF MONETARY POLICY According to D.C. ROWAN , `` Discretionary act undertaken by the authorities designed to influence (a) the supply of money (b) cost of money or rate of interest and (c) the availability of money.

MEANINGMonetary policy is an instrument which effect the credit flow in an economy.

The variation effect the demand & supply of credit in an economy, and the level or nature of economic activities.

OBJECTIVEStability in price levelEconomic developmentArrangement of full employmentExpansion of credit facilityEquality & JusticeStability in exchange rate

INSTRUMENTS

GENERAL (QUANTITATIVE) Methods

SELECTIVE (QUALITATIVE) Methods

GENERAL (QUANTITATIVE) MethodsMeaning:-

These methods help in credit control in the economy.

Affect total quantity of the credit.

Types of Quantitative methodsBank rate policy

Open market policy

Cash reserve ratio

Statuary reserve ratio

Bank Rate policyTraditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills.Todays 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.

Effect of Bank rateIncrease 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 economyUse in inflationary situationDecrease in bank rateDecrease 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 economyUse in depression situation

OPEN MARKET OPERATIONIts include the sales and purchase by the central bank of .AssetsForeign exchangeGoldGovernment securitiesCompany securities

Use of Open Market operationIn the inflationary situationCentral bank decrease the money supply.Central bank sale out the securities to commercial bank and control money supply.In the depressionary situationCentral bank increase the money supply.Central bank purchase the securities from the commercial bank.

CASH RESERVE RATIOCommercial bank has to keep a certain percentage of his deposits with central bank.It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

STATUARY LIQUIDITY RATIOCommercial bank is to keep a certain percentage of his deposit as liquid asset.It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

Use of C.R.R. & S.L.RIn Inflationary situationIncreased the percentage of cash reserve ratio and Statutory liquidity ratioIt reduces the supply of money in an economy

In Depressionary situationDecreased the percentage of cash reserve ratio and Statutory liquidity ratioIt increases the supply of money in an economy

Function of credit regulation the quantitative methodsFor expansion of creditReduce the bank ratePurchase of securitiesReduce the C.R.R.Reduce the S.L.R.For contraction of creditIncrease the bank rateSales of securitiesIncrease the C.R.R.Increase the S.L.R.

EXPANSIONARY MONETARY POLICY

TIGHT MONETARY POLICY

SPECIFIC OR QUALITATIVE CREDIT CONTROL

Adopt for expansion and contraction of credit to attain specific objective.

Methods of qualitative credit controlCredit rationing

Change in margin

Direct action

Marginal Requirement: Marginal Requirement of loan can be increased or decreased to control the flow of credit for e.g. a person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered.

RATIONINGUnder this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed.

DIRECT ACTIONUnder the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank ofIndia.

Moral Suasion This method is also known as Moral Persuasion as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. "A LIVER WITH OUT TEETH"

MEANINGMeasures related to taxation & public expenditure are normally called fiscal measures and the policy concerning them as known as FISCAL POLICY.

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

Objective of fiscal policyTo 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 EXPENDITURETAXATIONPUBLIC DEBT

PUBLIC EXPENDITURE

Meaning:- Government spending Productive Non-Productive

TYPES

PUMP PRIMINGThe government spending which will have the effect of setting the economy going on the way towards full utilization of resources.Example:- Gov Expenditure, building infrastructure etc.

COMPENSATORY SPENDINGThe 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.

EFFECTGov. 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 between saving & investment

TAXATIONMeaning:-Source of RevenueHelps Gov. to do there exp.Generated from public

Types of TaxDirect TaxDirect tax are those tax which a person pay to government directly for himself and can not enforce on other. For example:- income tax, wealth tax etc.Indirect taxIndirect tax are those tax which a person can on others.For example:- service tax, sales tax.

Effect of TaxationReduction in taxation Increase the disposable income.Increase the consumption power.Use for offsetting the deflation forces Increase in TaxationDecrease the disposable income.Decrease the consumption power.Use for offsetting the inflation forces.

PUBLIC DEBTWhen Gov. exp. are more then Gov. revenue Government take Public Debt.Deficit financing = Gov. exp. Gov. revenue.Government take the public debt to fulfill the gap between the Gov exp and the revenue.

Types of public debtBorrowing from publicBorrowing from commercial bankIssue of new currency

EFFECTPublic Debt effect the inflation and deflationIf 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.

Some facts and figuresMONETARY POLICY IS BEEN FRAMED BY? RBIFISCAL POLICY IS BEEN FRAMED Government PRESENT GOVERNOR OF R.B.I Dr. Raghuram Rajan September 4, 2013PRESENT FINANCE MINISTER OF INDIA Finance ministerP Chidambaram

CURRENT S.L.R23%(w.e.f. 11/08/2012) (announced on 31/07/2012) Decreased from 24% which was continuing since 18/12/2010 CURRENT C.R.R Cash Reserve Ratio (CRR)4.00% (wef 09/02/2013) -announced on 29/01/2013 Decreased from 4.25%which was continuing since 30/10/2012

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