Monetary Nd Fiscal Policy1
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Transcript of Monetary Nd Fiscal Policy1
7/30/2019 Monetary Nd Fiscal Policy1
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MEANING
Monetary policy is an instrument which effect
the credit flow in an economy.
Monetary policy is the process by which
monetary authority of a country, generally a
central bank controls the supply of money in
the economy by exercising its control over
interest rates in order to maintain pricestability and achieve high economic growth
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Objectives• Price Stability: implies promoting economic development with considerable
emphasis on price stability. The centre of focus is to facilitate the environment
which is favourable to the architecture that enables the developmental projectsto run swiftly while also maintaining reasonable price stability.
• Controlled Expansion Of Bank Credit :One of the important functions of RBI is
the controlled expansion of bank credit and money supply with special attention
to seasonal requirement for credit without affecting the output.
• Desired Distribution of Credit: Monetary authority has control over the decisions
regarding the allocation of credit to priority sector and small borrowers. This
policy decides over the specified percentage of credit that is to be allocated to
priority sector and small borrowers.
• Equitable Distribution of Credit :The policy of Reserve Bank aims equitable
distribution to all sectors of the economy and all social and economic class of people
• To Promote Efficiency It is another essential aspect where the central banks pay
a lot of attention. It tries to increase the efficiency in the financial system and
tries to incorporate structural changes such as deregulating interest rates, ease
operational constraints in the credit delivery system, to introduce new moneymarket instruments etc.
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INSTRUMENTS
GENERAL (QUANTITATIVE) Methods
SELECTIVE (QUALITATIVE) Methods
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GENERAL (QUANTITATIVE) Methods
Meaning:-
These methods help in credit control in theeconomy.
Affect total quantity of the credit.
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Types
A. Bank rate policy
B. Open market policy
C. Cash reserve ratio
D. Statutory Liquidity ratio
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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.
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Repo Rate and Reverse Repo Rate
• Repo Rate and Reverse Repo Rate :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.
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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
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Open Market operation
Its include the sales and purchase by the central
bank of ….
Assets
Foreign exchange
Gold
Government securitiesCompany securities
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Use of Open Market operation
In the inflationary situation
Central bank decrease the
money supply.
Central bank sale out thesecurities to commercial
bank and control money
supply.
In the depressionary situation
Central bank increase the
money supply.
Central bank purchase thesecurities from the
commercial bank.
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Cash Reserve Ratio
Commercial bank has to keep a certain
percentage of its deposits with central bank.
It control the cash flow in economy.
It keeps changes in monetary policy framedby central bank of a country.
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STATUTORY LIQUIDITY RATIO
Commercial bank is to keep a certain
percentage of its deposit as liquid asset.
It control the cash flow in economy.
It keeps changes in monetary policy framedby central bank of a country.
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Use of C.R.R. & S.L.R
In Inflationary situation
o Increased the percentage of
cash reserve ratio and
Statutory liquidity ratioo It reduces the supply of
money in an economy
In Depressionary situation
o Decreased the percentage
of cash reserve ratio and
Statutory liquidity ratioo It increases the supply of
money in an economy
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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.
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Specific or qualitative Credit Control
Adopt for expansion and contraction of creditto attain specific objective.
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Methods of qualitative credit control
• Prescription of margin requirements: While
giving loans commercial banks against stock or
securities it keeps margin.
• Consumer credit regulation: Credit made
available by CB’s for purchase of consumerdurables
• Direct action: when CB’s does not cooperate
with central bank
• Moral Suasion: means persuasion and
request.
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Types of Monetary Policy
• An expansionary monetary policy (e.g.,
decrease in interest rates) increases the supply
of money. An expansionary monetary policy
might be used during a recession to encourage
banks to extend credit to consumers and
entrepreneurs. A contractionary monetary
policy (e.g., increase in interest rates) wouldconversely shrink the money supply, and might
be used to prevent or control inflation during a
period of economic growth
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• Rates (%) w.e.f.
• Bank Rate 9.50% 13.02.2012
• Repo Rate 8.50% 25.10.2011
• Rev. Repo Rate 7.50% 25.10.2011
• C R R 4.75% 09.03.2012
• S L R 24.00% 18.12.2010
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MEANING
• The fiscal policy is concerned with the raising of government revenue and incurring of governmentexpenditure. To generate revenue and to incurexpenditure, the government frames a policy called
budgetary policy or fiscal policy. So, the fiscal policy isconcerned with government expenditure andgovernment revenue.
• In short, fiscal policy or budgetary policy consists of steps & measures which the government in order tofulfill the aims of economic policy.
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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.
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INSTRUMENTS
PUBLIC EXPENDITURE
TAXATION
PUBLIC DEBT
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PUBLIC EXPENDITURE Meaning:- There are large number of public expenditure like
opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects
govt has paid large amount for purchasing and paying wages
and salaries all these expenditure are paid after making govt.
expenditure policy . Govt. can increase or decrease the amount
of public expenditure by changing govt. budget . So , govt.
expenditure is technique of fiscal policy by using this , govt. use
his fund first on very necessary sector and other will be done
after this .
Government spending
Productive
Non-Productive
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Types
PUMP PRIMING
The government spending
which will have the effect of
setting the economy goingon 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.
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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 betweensaving & investment
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TAXATION
Meaning:- Taxation policy is relating to new amendments in
direct tax and indirect tax . Govt. of India passes finance bill
every year . In this policy govt. determines the rate of taxes .
Govt. can increase or decrease these tax rates and amend
previous rules of taxation .Govt.'s earning's main source istaxation . But more tax on public will adverse effect on the
development of economy.
Source of Revenue
Helps Gov. to do there exp.
Generated from public
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Types of Tax
Direct Tax
• Direct tax are those tax
which a person pay to
government directly forhimself 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.
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Effect of Taxation
Reduction in taxation
Increase the disposable
income.
Increase the consumptionpower.
Use for offsetting the
deflation forces
Increase in Taxation
Decrease the disposable
income.
Decrease the consumptionpower.
Use for offsetting the
inflation forces.
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Public Debt
When Gov. exp. are more then Gov. revenueGovernment take Public Debt.
Deficit financing = Gov. exp. – Gov. revenue.
If Govt. thinks that deficit financing is notsufficient for fulfilling the public expenditure or if
govt. does not use deficit financing , then govt.
can take loan from world bank , or take loanfrom public by issuing govt. securities and bonds
Government take the public debt to fulfill the
gap between the Gov exp and the revenue.
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Types of public debt
Borrowing from public
Borrowing from commercial bank
Issue of new currency
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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.
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Limitation of Fiscal Policy 1. After issuing new notes for payment of govt. of expenses , inflation of India is
increasing rapidly and in this inflation , prices of necessary goods are increasing
very fastly. Living of poor person has become difficult . So , these sign shows the
failure of Indian fiscal policy.
2. Govt. fiscal policy has failed to reduce the black money . Even large amount
of past minister is in the form of black money which is deposited in Swiss Bank.
3. After taking loan from world bank under the fiscal policy's debt technique , govt.
has to obey the rules and regulations of world bank and IMF . These rules are
more harmful for developing small domestic business of India.
4. After expending large amount for generating new employment under fiscal policy, rate of unemployment is increasing fastly and big lines on govt. employment
exchange can be seen generally in working days . Database of employment
exchanges are full from educated unemployed candidates .
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Some facts and figures
Monetary policy is been framed by……………
Fiscal policy is been framed by………………
Present governor of R.B.I……………………
Present Finance minister of India……………….
Current S.L.R…………………….
Current C.R.R…………………..
Monetary policy in India framed under whichact……………………….