monteary policy

VISHAL SINGHARJUN CHAHUANAKASH SHARMANITIN TYAGI

MONETARY POLICY

MEANING 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.”

MEANING

Monetary 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.

OBJECTIVE

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

INSTRUMENTS

GENERAL (QUANTITATIVE) Methods

SELECTIVE (QUALITATIVE) Methods

GENERAL (QUANTITATIVE) Methods

Meaning:-

These methods help in credit control in the economy.

Affect total quantity of the credit.

Types of Quantitative methods

A. Bank rate policy

B. Open market policy

C. Cash reserve ratio

D. Statuary reserve 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.

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 ….

AssetsForeign exchangeGoldGovernment securitiesCompany securities

Use of Open Market operation

In the inflationary situation Central bank decrease the

money supply. Central bank sale out the

securities to commercial bank and control money supply.

In the depressionary situation Central bank increase the

money supply. Central bank purchase the

securities from the commercial bank.

CASH RESERVE RATIO

Commercial 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 RATIO

Commercial 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.R

In Inflationary situationo Increased the percentage of

cash reserve ratio and Statutory liquidity ratio

o It reduces the supply of money in an economy

In Depressionary situationo Decreased the percentage

of cash reserve ratio and Statutory liquidity ratio

o 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.

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 control

• Credit 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.

RATIONING

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

DIRECT ACTION

• Under 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"

MEANING• Measures 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 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:- Government spending Productive Non-Productive

TYPES

PUMP PRIMING The 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 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 between saving & investment

TAXATION

Meaning:-Source of RevenueHelps 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 for himself 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 consumption

power. Use for offsetting the

deflation forces

Increase in Taxation Decrease the disposable

income. Decrease the consumption

power. Use for offsetting the

inflation forces.

PUBLIC DEBT

When 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 debt

Borrowing from publicBorrowing from commercial bankIssue 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.

Some facts and figures MONETARY POLICY IS BEEN FRAMED BY? RBI FISCAL POLICY IS BEEN FRAMED Government PRESENT GOVERNOR OF R.B.I Dr. Raghuram Rajan September 4, 2013 PRESENT FINANCE MINISTER OF INDIA Finance minister P Chidambaram

CURRENT S.L.R• 23%(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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