Monetary & fiscal policy
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Transcript of Monetary & fiscal policy
ESSENTIALS OF BUSINESS ESSENTIALS OF BUSINESS ENVIRONMENTENVIRONMENT
Chapter 26MONETARY AND FISCAL POLICIES
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Learning Objectives
Define monetary policy, understand techniques to measure the extent of money, and evaluate RBI’s monetary policy
Understand the meaning and functions of money market, examine operations in money market and assess functioning of commercial banks
3Define fiscal policy, know how budget operates and make critical assessment of fiscal policy
Bring out the highlights of the Union Budget 2000-2001
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
M1 This represents money supply with the public. M1 has two components; (a) currency with the public and (b) deposits of the public with the banks.
Currency with the public is the sum total of notes in circulation and circulation of rupee coins and small coins minus the cash on hand with banks.Deposits of the public with banks is the sum total of demand deposits with banks and ‘other’ deposits of the public with the RBI.
M2 This represents the total of M1 plus post office savings and bank deposits.
M3 It is the sum total of M2 and the time deposits with banks.
M4 This represents M3 plus total post office deposits.
Extent of MoneyExtent of Money
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Control MeasuresControl Measures
General Selective
Bank Rate
Open Market Operations
Special Facilities to some groupsLiberalisation of the BillMarket SchemeCash Reserve RequestStatutory Liquidity RatioRefinance Policy
(i) Insisting on minimum margins for lending against specific securities;(ii) Fixing a ceiling on the amounts of credit for certain purposes;(iii)Charging discriminatory rates of interest on certain types of advances;(iv) Moral suasion and(v) Direct action.
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Balance Sheet of Monetary PolicyBalance Sheet of Monetary Policy Weaknesses Strengths
— Higher proportion of non-banking credit — Decision making and implementation is — No check on price rise faster than fiscal policy— High currency-deposit ratio rendering — More reliance on selective credit
control the RBI’s role less effective measures and less on quantitative controls
— Selective application of credit making RBI’s pressure on commercial constraints banks severe less
— Defective statistical and monitoring system.— Growing fiscal needs of the economy — Has been responsive to the needs of
the economy
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Functions of Money MarketFunctions of Money Market1. By providing various kinds of credit instruments suitable and
attractive for different sections, a money market augments the supply of funds.
2. The efficient working of the money market helps minimise the gluts and stringencies in the money market due to the seasonal variations in the flow of and demand for funds.
3. A money market helps avoid seasonal fluctuations in interest rates.4. A money market, by augmenting the supply of funds and making
them readily available to the legitimate borrowers, helps in making funds available at cheaper rates.
5. A well-organised money market, through the quick transfer of funds from one place to another, helps avoid regional gluts and stringencies of funds.
6. It enhances the amount of liquidity available to the economy. 7. A money market, by providing profitable investment opportunities for
short-term funds, helps increase the profit of financial institutions and individuals.
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Money Market OperationsMoney Market Operations
(i) Call (overnight) money(ii) Notice money(iii) Commercial Bills(iv) Treasury Bills(v) Certificates of Deposits
(vi) Commercial papers. (vii) Repos
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Agenda in Fiscal Management
(i) Completion of the tax reform agenda (ii)Curb wasteful expenditure(iii) Minimise budgetary allocations to public
sector undertakings(iv) Adopt a new approach to administered
prices (v) Reduce and redirect subsidies
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Features of the Outcome Budget
(i) A single document to offer details on the financial allocations for the next year, physical performance targets expected to be achieved as a result of the outlay and the actual outcome achieved in the first nine months of the current year.
(ii) The same document will list out what are called ‘tax expenditures.’ These are the revenues foregone while promoting the government’s policy objectives. The ideas would be to capture the real cost of certain measures that the government takes to implement its policies.
(iii) The financial allocation for programmes in the Outcome Budget will also include the resources being pooled in by states and other public sector as well as autonomous bodies.
(iv) The ministries will have the option to appoint independent evaluators to examine the effectiveness of programmes for which financial
allocations have been made.
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Monetary PolicyMonetary Policy
Monetary policy refers to the policy of RBI regulate Monetary policy refers to the policy of RBI regulate supply of money and credit for achieving the objectives supply of money and credit for achieving the objectives of economic policy. The main objectives of monetary of economic policy. The main objectives of monetary policy are:policy are:
• expansion in the supply of moneyexpansion in the supply of money• control on the expansion of credit control on the expansion of credit • achieving price stabilityachieving price stability• maintain healthy balance of payment maintain healthy balance of payment
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies
Fiscal PolicyFiscal Policy
Fiscal policy refers to the policy of government regarding Fiscal policy refers to the policy of government regarding taxation, public expenditure, and public debt. The taxation, public expenditure, and public debt. The objectives of fiscal policy are:objectives of fiscal policy are:
• accelerating the rate of investmentaccelerating the rate of investment• promoting socially desirable investmentpromoting socially desirable investment• achieving rapid economic developmentachieving rapid economic development• achieving full employmentachieving full employment• promoting foreign tradepromoting foreign trade• reducing inequalities of income reducing inequalities of income • establishing a welfare stateestablishing a welfare state
Himalaya Publishing HouseEssentials of Business Environment
K. Aswathappa
Chapter 26Monetary and Fiscal Policies