Fiscal monetary


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Fiscal monetary

  1. 1. Faculty of Management Studies, MDSU, Ajmer Presented By: Anubhav Jain Manish Sharma Rohit Jain Rohit Sharma A Presentation on “ Monetary & Fiscal Policy ” Presented in class of: Dr. Ashish Pareek
  2. 2. Monetary Policy <ul><li>The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy. </li></ul><ul><li>This include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M1, M2, M3 and M4 - which indicates the level (stock) of legal currency in the economy. </li></ul><ul><li>Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. </li></ul>
  3. 3. <ul><li>RBI employs 4 measures of money stock:- </li></ul><ul><li>M1: The measure of money stock designated by M1 is usually described as the money supply. As on 24 Dec. 2004, M1 was ` 6,07,825 crore. </li></ul><ul><li>M2: M1+Post office Savings Bank Deposits. As on March 23, 2001, M2 was ` 3,83,569 crore. </li></ul><ul><li>M3: M1+Time Deposits with Banks. As on 24 Dec, 2004, M3 was ` 21,51,538 crore. </li></ul><ul><li>M4: M3+total Post Office Deposits. As on 23 March, 2001, M4 was ` 13,32,060 crore. </li></ul>Continue… Measures of Money Stock
  4. 4. <ul><li>The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. </li></ul><ul><li>Stability for the national currency (after looking at prevailing economic conditions) </li></ul><ul><li>growth in employment and income are also looked into. </li></ul><ul><li>The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications. </li></ul>Continue… Objectives of Monetary Policy
  5. 5. <ul><li>Bank Rate of Interest </li></ul><ul><li>Cash Reserve Ratio </li></ul><ul><li>Statutory Liquidity Ratio </li></ul><ul><li>Open market Operations </li></ul><ul><li>Margin Requirements </li></ul><ul><li>Deficit Financing </li></ul><ul><li>Issue of New Currency </li></ul><ul><li>Credit Control </li></ul>Continue… Instruments of Monetary Policy
  6. 6. <ul><li>It is the interest rate which is fixed by the RBI to control the lending capacity of Commercial banks. </li></ul><ul><li>During Inflation , RBI increases the bank rate of interest due to which borrowing power of commercial banks reduces which thereby reduces the supply of money or credit in the economy. </li></ul><ul><li>When Money supply Reduces it reduces the purchasing power and thereby curtailing Consumption and lowering Prices. </li></ul>Continue… Bank Rate of Interest
  7. 7. <ul><li>CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. </li></ul><ul><li>During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits with the RBI . </li></ul><ul><li>This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation. </li></ul>Continue… Cash Reserve Ratio
  8. 8. <ul><li>Banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements . </li></ul><ul><li>If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy. </li></ul>Continue… Statutory Liquidity Ratio
  9. 9. <ul><li>It refers to the buying and selling of Govt. securities in the open market . </li></ul><ul><li>During inflation RBI sells securities in the open market which leads to transfer of money to RBI. Thus money supply is controlled in the economy. </li></ul>Continue… Open Market Operations
  10. 10. <ul><li>It means printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. </li></ul><ul><li>Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation. </li></ul>Continue… Deficit Financing
  11. 11. <ul><li>During Inflation the RBI will issue new currency notes replacing many old notes. </li></ul><ul><li>This will reduce the supply of money in the economy. </li></ul>Continue… Issue of New Currency
  12. 12. <ul><li>Fiscal Policy is that part of Govt. policy which is concerned with raising revenue through taxation and other means and deciding on the level and pattern of expenditure. </li></ul><ul><li>The Fiscal Policy operates through the budget. </li></ul><ul><li>Budget is an estimate of govt. expenditure and revenue for the ensuing financial year. </li></ul>Fiscal Policy
  13. 13. <ul><li>Reduction of Govt. Expenditure </li></ul><ul><li>Increase in Taxation </li></ul><ul><li>Imposition of new Taxes </li></ul><ul><li>Wage Control </li></ul><ul><li>Public Debt </li></ul><ul><li>Increase in savings </li></ul><ul><li>Maintaining Surplus Budget </li></ul>Continue… Instruments of Fiscal Policy
  14. 14. <ul><li>The Fiscal policy decisions are set by the National Govt. where as Monetary Policy is being implemented by the central bank i.e. the RBI. </li></ul><ul><li>Fiscal policy deals in govt. spending and revenue collection by the way of tax. Whereas Monetary Policy is a process which controls the demand and supply of money. </li></ul><ul><li>Fiscal policy relates to the economic position of a nation. Monetary policy focuses on the strategy of banks. </li></ul>Difference Between Monetary Policy & Fiscal Policy
  15. 15. <ul><li>Fiscal policy administers the taxation structure of the nation. Monetary Policy helps to stabilize the economy of the country. </li></ul><ul><li>Fiscal policy speaks of the government’s economic program. Monetary policy sets the program of all commercial banks of the nation. </li></ul>Continue…