DEFINITION According to Prof. Harry Johnson, "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."
OBJECTIVES Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Equal Income
EVOLUTION OF MONETARY POLICY IN INDIA After the crises in 1991, stabilization went simultaneously with structural reforms. Change in context fundamentally altered the manner in which monetary policy began to be formulated Macroeconomics and price stability received greater emphasis Continuous rebalancing of priority between growth and price stability
HISTORY OF MONETARY POLICYWith the creation of the bank of England in 1694,which acquired the responsibility to print the notes and back them with gold after that monetary policy as independent established. The goal of monetary policy was to maintain the value of the coin, print notes which would trade at par to spicie. and prevent coins from leaving circulation.During the year 1870-1920, the industrialized nations set up central banking system.
INSTRUMENTS OF MONETARY POLICY General (Quantitative) Methods Selective (Qualitative) Methods
QUANTITATIVE METHODSBank RateThis is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Bank Rate is 6% and also known as discount rate.
Open market operationsIt is purchase and sale by central bank of a variety of assets,such as foreign exchange,gold and government securities
Cash reserve ratio Every commercial bank has to keep,acertain percentage of their deposits with the central bank called as cash reserve ratio. At present it is 6%
Statutory Liquidity RatioThis term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. It regulates the credit growth in India. At present SLR is 24%.
QUANTITATIVE TOOLS OF MONITORY POLICY The lending and investments+ Credit Rationing : certain conditions are laid by the Central Bank to see proper regulation of consumer credit. Direct Action: It has its direction and restrictive measures, which all the concern banks should follow regarding .
QUANTITATIVE Quantitdf ative + Credit Rationing : certain conditions are laid by the Central Bank to see proper regulation of consumer credit. Direct Action: It has its direction and restrictive measures, which all the concern banks should follow regarding the lending and investment
Margin Requirement : This is done keeping in view the difference between the value of security and the amount of ad. Moral Persuasion: It helps the Central Bank to secure the willingness and co- operation, but then that depends on the amount of respect and authority the Central Bank enjoys among the member banks to cover any loss.
MONEY SUPPLY Meaning of money supply In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. Money Money refers to currency in circulation and demand deposits. Money supply and monetory policy is also a mean of control of inflation There are four major players of money supply Central bank bank depositors borrowers from bank
DEPLOYMENTS OF MONEY SUPPLY Net bank credit to government (A): . Bank credit to commercial sector (B . Government’s currency liabilities to the public (D): Net foreign exchange assets of banking sector (C . Banking sectors’ net non-monetary liabilities other than time deposits (E):
MEASURES OF MONEY STOCK The RBI employs four measures of money stock, namely M1, M2, M3 and M4. M1 : This is the money supply i.e the currency with the public and demand deposits with the bank and other deposits with RBI. In developed countries demand deposits form a major part of the money supply. Demand deposits are primarily savings and current account deposits where your are able to "demand" your money at any time, unlike a term deposit, which cannot be accessed for a predetermined period.
M2: M1+Post Office Savings M3 or aggregate money supply : M2 Time Deposits with the banks. M4: M3+total Post office deposits
MAJOR TYPES OF CURRENCY There are four major types of currency.1. Reserve currency A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.2. Commodity block currency A currency that belongs to a country whose economy is strongly correlated with the price fluctuations of a certain commodity.
3. Weak currency A currency with value that has depreciated significantly over time against other currencies.4. High risk currencies A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
FISCAL POLICY Fiscal Policy is the main part of Economic policy and Fiscal Policys first word Fiscal is taken from French word Fisc it means treasure of Govt. So we can define fiscal policy as the revenue and expenditure policy of Govt. of India .It is prime duty of Government to make fiscal policy . By making this policy , Govt. collects money from his different resources and utilize it in different expenditure . Thus fiscal policy is related to development policy . All welfare projects are completed under this policy
TECHNIQUE OF FISCAL POLICY Taxation Policy Public Expenditure Policy Public Debt Policy Deficit Financing Policy
OBJECTIVES OF FISCAL POLICY Development of Country Employment Inequality Fixation of Govt. Responsibility
THE UNION BUDGET An estimate of all anticipated revenue and expenditure of the Union Government. The Union Budget is laid before Parliament on the last working day of february every year. All receipts and expenses of the Union Govt. are kept under – The Consolidated Fund – All revenue raised by Govt., loans raised by it and also receipts from recoveries of loans granted from the Consolidated Fund. All expenditure is incurred from the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund without authorisation from Parliament.. Public Account – It includes all other receipts & disbursements such as deposits, service funds & remittance, which is not subject to vote of parliament
The presentation , followed by generaldiscussion on the budget in both housesof Parliament.The estimates from the ConsolidatedFund of India , are placed before the Lok Sabhain the form of Demand for Grants.All withdrawls are then authorised byan Appropriation Act.The tax proposals are embodied in another billwhich is passed as the Finance Act of the year.These are audited by the Comptroller andAuditor General.
THE STRUCTURE OF THE BUDGETBudget is divided into revenue (receipts)& expenditure (disbursements). Horizontally itis divided into revenue accounts & capital accounts.Thus receipts are divided as revenue & capitalreceipts. Disbursements are divided as revenue &Capital expenditureThe revenue expenditure includes all current expenditure of Govt. on administration , capitalexpenditure includes all the capital transaction of theGovt.The revenue receipts include revenue from taxes, capitalreceipts include market loans, external aid, income fromrepayments & other receipts.
STATE BUDGETEstimates of receipts and expenditure arepresented by State Govt. to theirlegislature before the beginning of thefinancial year and legislative sanction forexpenditure is secured through similarprocedure.
CURRENT SCENARIO OF MONETARY POLICY The following features of monetry policy were revised as on Oct. 25, 2011:- Repo Rate: Increase in the repo rate by 25 basis points from 8.25 per cent to 8.50 per cent. Reverse Repo Rate: The reverse repo rate under the LAF(liquidity adjustment facility), determined with a spread of 100 basis point below the repo rate, automatically adjusts to 7.50 per cent . Marginal Standing Facility (MSF) Rate: MSF rate, determined with a spread of 100 basis points above the repo rate, stands calibrated at 9.50 per cent. Bank Rate: The Bank Rate has been retained at 6.0 per cent. Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their NDTL.
ADVANTAGES AND LIMITATIONS OF MONETARYPOLICYADVANTAGES Price stability External economic stability Economic developmentLIMITATIONS Limitations during deflation Lags in monetary policy Changes in the velocity of money Attitude of banks