MONETARY POLICY & FISCAL POLICY

PRESENTED BYSIMRAN KAUR

Monetary policy regulates the supply of money

and availability of credit in the economy It deals with both the lending and borrowing

rates of interest of commercial banks It refers to the credit control measures

adopted by central bank of a country RBI is responsible for formulating and

implementing monetary policy of India

MONETARY POLICY

To achieve price stability To attain exchange rate stability To avoid negative impacts of business cycle To experience full employment position

OBJECTIVES OF MONETARY POLICY

BANK RATE : rate of interest charged by RBI

against the commercial bank borrowings RESERVE RATIO [CRR (Cash Reserve Ratio)

and SLR (Statutory Liquidity Ratio)] : RBI insist on commercial banks to keep a certain percentage as reserve in their hands for ensuring liquidity and regulating credit

OPEN MARKET OPERATION : RBI selling the government securities to the public

INSTRUMENTS OF MONETARY POLICY

MARGIN REQUIREMENTS : Margin requirement

for mortgaging against the loans will be increased to credit and it will be reduced to increase the credit flow

CREDIT RATIONING : The loans and advances are provided only for production purpose and for essential activities to cut down the money in circulation

INSTRUMENTS OF MONETARY POLICY

MORAL SUASION : RBI controls the commercial

banks for creating loans and advances by persuasion through issue of circular

DIRECT ACTION : Sometimes RBI takes direct action against the credit created by the banks in contravention of RBI guideline to overcome the inflationary situation

INSTRUMENTS OF MONETARY POLICY

Monetary policy operates in a broad front Success and failure depends on the banking

system of the country It has institutional restrictions Unorganized money market doesn’t support

monetary policy Existence of non-monetized sector defies RBI’s

regulation It is not very effective in overcoming

depression

LIMITATIONS OF MONETARY POLICY

Economic development needs the support of

credit planning Improving efficiency of banking system Decide interest rates Public debt management

MONETARY POLICY & ECONOMIC DEVELOPMENT

Fiscal policy is defined as the conscious attempt of

the government to achieve certain macro economic goals of policy by altering the volume and pattern of its revenue and expenditure and the balance between them

It is a budgetary policy The major economic goals of fiscal policy are to

maintain a high average level of employment and business activity, to minimize fluctuations in employment activity, prevent inflation and to produce and promote economic growth

FISCAL POLICY

To maintain economic stability in the country To bring price stability To achieve full employment To provide social justice To promote export and introduce import

substitution To mobilize more public revenue To reallocate available resources To achieve balanced regional growth

OBJECTIVES OF FISCAL POLICY

CAPITAL EXPENDITURE : spending on

construction of road, dams and others CONSUMPTION EXPENDITURE : Government

expenditure on consumption of goods and services

INTEREST PAYMENT : interest paid by the government against the borrowings or national debt

TRANSFER OF PAYMENTS : Governments’ transfer of money from one sector to other

INSTRUMENTS OF FISCAL POLICY

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