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Understanding Monetary & Fiscal
Policy
Presented By
Anil Nandyala
AGENDA
Why it is important to know ?
RBI’s Roll
Monetary Policy
RBI’s Tools to control Monetary Policy
Factor’s Impacting Monetary Policy
Economic Cycle
Fiscal Policy
Fiscal Policy Tools
Monetary & Fiscal Policy Review
Why it is important to know ?
Decision making
Getting an idea about how country is heading
Measuring the performanceEx : Fuel Subsidies
RBI’s Role
Monetary Policy Maintaining price stability and ensuring adequate flow of
credit to productive sectors
Regulator & Supervisor of Financial System Importance of regulating Financial sector Ex: Saradha chit fund ($ 4-6 billon loss, 1.7M investors) Ex: Bank-run scenario (ICICI Bank), Lehman Brothers
Collapse
Manager of Foreign Exchange
Issuer of Currency
Developmental Role
Monetary Policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment
RBI’s Tools to control Monetary Policy
Cash Reserve Ratio – 4%
Statutory Liquidity Ratio – 23%
Repo – 8%
Reverse Repo – 7%
Marginal Standing Facility Rate – 9%
Open market operationsEx : US Quantitative Easing ($80 B/M)
Economic Cycle
Factor’s Impacting Monetary Policy
Fiscal Policy not in tandem with Monetary Policy
Ex: LPG subsidy
Government spending in subsidies
Much of the Income is spent on needs, unlike the developed economies (per capita income : Rs 5729/month)
Wastage of Vegetables (40%)
Whole sale price index is used as reference
FISCAL POLICY
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy
Fiscal Policy Tools
Taxation Vodafone case
Spending Investment activities Subsidies
Government Expenditure Breakdown
Impact’s of Bad Fiscal Policy
Fiscal Deficit – crowding out money
Rating downgrade (Lowest Investment Rating)
Currency Depreciation
High Interest rates
Inflation
Monetary & Fiscal policy Review
Monetary PolicyStringent: One of the few economies not much
impacted by Financial crisisCosts: Availability of the credit
Fiscal PolicyNot Stringent : Not looking in to core problemsEx: Food security billPopulation controlEducation system
Thank You