Presentation on

Monetary
Policy and
fiscal
policy
Presented by:
AKHILESH MISHRA
(PGDM FINANCE)
( ACCAMN INSTITUTE OF
MANAGEMENT)
MONETRY POLICY
 Definition:
 The part of the economic policy which regulates
the level of money in the economy in order to
achieve certain objectives.


In INDIA,RBI controls the monetary policy. It is



announced twice a year, through which RBI,regulate

the price stability for the economy.

1.slack season April-September
policy

2.Busy season October-March
policy
 Objectives of monetary
policy:
• Maximum feasible output.
• High rate of growth.
• Fuller employment.
• Price stability.
• Greater equality in the distribution of
income and wealth.
• Healthy balance in balance of
payments(BOP).
•
Types of control :
 Qualitative control tools:
o
o Selective credit control
o They are distinguishable from quantitative tools by
the fact that they are directed towards particular
uses of credit and merely to total volume
outstanding
Important selective control measures are:

 Rationing of credit.
 Direct action.
 Changes in margin requirements.
 Regulation of consumer credit.
 Moral suasion.
o
Quantitative control tools:
• 1.Open market operations:
 It refers to the purchase or sale by the
central bank of any securities in which it deals, such as the
government securities, banker’s acceptances or foreign
exchange.

 When central bank offers securities for sale, it intends to
contract money supply and credit.

 When the central bank pursuing the expansionary monetary
policy will buy securities in the market, so that supply and
credit capacity will be increased.
 OMO’s tools:
Repo rate:


• A repurchase agreement or ready forward

deal is a secured short-term (usually 15
days) loan by one bank to another
against government securities.
• Legally, the borrower sells the securities to
the lending bank for cash, with the
stipulation that at the end of the
borrowing term, it will buy back the
securities at a slightly higher price, the
difference in price representing the
interest.
•
• Reverse repo rate is the rate that RBI offers
the banks for parking their funds with it.
Reverse repo operations suck out
liquidity from the system.
 Bank rate policy :
 Bank rate is the minimum rate at which the central
bank provides loans to the commercial banks. It is also
called the discount rate.


• Dear money policy:

 Bank rate inc interest rate inc borrowing will be
less profitable results contraction of credit.


• Near money policy:

 Bank rate dec interest rate low borrowing will
be more profitable results expansion of credit.
•
Trends of Bank rate:
 Reserve requirements
changes:
 The central bank of a country is empowered to
determine within statutory limits, the cash reserve
requirements of the commercial banks.


 Statutory liquid ratio:

 Bank has to keep portion of total
deposits with itself in liquid assets.
Cash reserve ratio:

 The percentage of bank’s deposits

which they must keep as cash with RBI.



CRR trend:
SLR trend:
 Fiscal Policy-Meaning
• The word fisc means ‘state treasury’ and fiscal
policy refers to policy concerning the use of
‘state treasury’ or the govt. finances to
achieve the macroeconomic goals.
• “any decision to change the level, composition or
timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax
payment is fiscal policy.”
- G.K. Shaw
 Objectives of Fiscal Policy
• It has 2 major objectives:
i. GENERAL obj-. aimed at achieving
macroeconomic goals
ii.SPECIFIC obj-. relating to any typical
problems of an economy


•
 Fiscal Policy And
Macroeconomic Goals
• Economic Growth: By creating conditions for increase in
savings & investment.
• Employment: By encouraging the use of labour-
absorbing technology
• Stabilization: fight with depressionarytrends and
booming (overheating) indications in the economy
• Economic Equality: By reducing the income and wealth
gaps between the rich and poor.
• Price stability: employed to contain inflationary and
deflationary tendencies in the economy.

 Instruments of Fiscal Policy
• Budgetary surplus and deficit
• Government expenditure
• Taxation- direct and indirect
• Public debt
• Deficit financing
 Budgetary surplus and deficit
• “A budget is a detailed plan of operations for
some specific future period”
• Keeping budget balanced (R=E) or deficit (R<E)
or surplus (R>E) as a matter of policy is itself a
fiscal instrument.
• An accumulated deficit over several years (or
centuries) is referred to as the government debt
• A deficit is a flow. And a debt is a stock. Debt is
essentially an accumulated flow of deficits

 Government Expenditure
Ø It includes :
• Government spending on the purchase of
goods & services.
• Payment of wages and salaries of
government servants
• Public investment
• Transfer payments
 Taxation
• Meaning : Non quid pro quo transfer of
private income to public coffers by
means of taxes.
• Classified into
1. Direct taxes- Corporate tax, Div. Distribution
Tax, Personal Income Tax, Fringe Benefit taxes,
Banking Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs,
Service Tax, excise duty.
 Public debt
• Internal borrowings
1. Borrowings from the public by means of treasury bills and
govt. bonds
2. Borrowings from the central bank (monetized deficit
financing)
• External borrowings
1. foreign investments
2. international organizations like World Bank &
IMF
3. market borrowings

Deficit Financing:
• It refers to the ways in which the budgetary gap is
financed.


• However, in developing countries, resort is made to

the central bank to cover the deficit. The central
bank merely release more notes and these are then
put into circulation on behalf of the government.


• Therefore in these countries, deficit financing is

tantamount to printing more currency( creation of
money).
 Thank You
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process th e s s en ti a l services
ess to nity”.
ensures acc ll sections of the commu
ra
education fo
a n m o h a n Singh,
-Dr. M
r
Prime Ministe