Economic Policy-monetary policy,significance,drawbacks and validity in present scenario.

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  • Economic Policy-monetary policy,significance,drawbacks and validity in present scenario.

    1. 1. Course Code : BE03C15 JITHIN JOY Class No:361 PG Department of Commerce Deva Matha College, India
    2. 2. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    3. 3. Economic policy Definition Economic policy refers to the actions that governments take in the economic field . Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as Political Belief and the consequent policies of parties. Economic Policy -- “medicine” given to cure a “sick” economy. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    4. 4. It is usually comprised of various measures, through which the government seeks to influence the overall economy. There are three methods through which a government typically seeks to control the economy with its budget, The Allocative, The allocative function refers to how much of the government’s budget will be allocated to certain projects  Stabilization, A government may use the stabilization function to stabilize a nation’s economy by controlling interest rates or inflation, and by pushing the employment rate towards full employment and Distributive functions. The distributive function of a government’s economic policy refers to the different levels of taxation and the economic burden that each economic level must bear JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    5. 5. Types of Economic Policies  Industrial policy  Trade policy  Foreign Exchange policy  Fiscal policy  Monetary policy JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    6. 6. MONETARY POLICIES IN INDIA, AND IT’S SIGNIFICANSE JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    7. 7. MEANING Monetary policy refers to the steps taken by the Central Bank, Currency board, or other regulatory committee to regulate the cost & supply of money & credit in order to achieve the socio-economic objectives of the economy. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    8. 8. According to D.C.ROWAN , Discretionary act undertaken by the authorities designed to influence (a) the supply of money (b) cost of money or rate of interest and (c) the availability of money.” JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    9. 9. Types of Monetary policy 1.Inflation Targeting 2.Price Level Targeting 3.Monetary Aggregates- The growth in money supply 4.Fixed Exchange Rate- The spot price of the currency 5.Gold Standard- The spot price of gold 6.Mixed Policy- Usually interest rates JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    10. 10. OBJECTIVES OF MONETARY POLICY 1. 2. 3. 4. 5. 6. 7. 8. 9. Business cycle management Economic Growth Price stability Controlled expansion of bank credit Promotion of exports Desired distribution of credit BOP equilibrium Equitable distribution of national income Promoting priority sectors JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    11. 11. (A)Quantitative Instruments or General Tools These tools are related to the Quantity or Volume of the money. I. Bank Rate Policy II. Open Market Operation III. Variation in the Reserve Ratios * CRR- % of net demand & time deposits to be kept in Central Bank * SLR- % of reserve maintained in liquid assets * Repo Rate- Rate at which central bank lends to banks * Reverse Repo-Rate at which central bank borrows JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    12. 12. (B) Qualitative Instruments or Selective Tools They are used for discriminating between different uses of credit 1 . Fixing Margin Requirements 2. Consumer Credit Regulation 3. Publicity 4. Credit Rationing 5. Moral Suasion 6. Control Through Directives 7. Direct Action 8. Differential Interest Rate (DIR) JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    13. 13. Process of Monetary Policy Formulation JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    14. 14. Significance of monetary policy JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    15. 15. How Does Monetary Policy Affect the Economy? Ans : via Transmission mechanism of monetary policy This is the process through which monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism is characterized by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    16. 16. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    17. 17. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    18. 18. Significances 1. Managing Financing conditions in the economy 2. The availability of credit 3. Influence on expectations about economic activity 4. It can affect the prices of goods, asset prices, exchange rates as well as consumption and investment. 5. Price (substitution) and income effects 6. Cushion for absorbing economic cycle changes 7. Economic Growth 8. Price stability 9. Promotion of exports 10. Promoting priority sectors JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    19. 19. RECENT MOVES IN INDIAN MONETARY POLICY JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    20. 20. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    21. 21. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    22. 22. Faulty monetary policies of July 2013 As everyone knows, between the 15th and the 23rd of July, the RBI announced excessively harsh monetary measures, which effectively increased the short-term policy rates by 300 basis points and sharply reduced liquidity. The measures were taken ostensibly to defend the falling rupee by restricting "speculation". The diagnosis was fundamentally incorrect. The rupee was not weakening due to short-run "speculation" but because of a persisting high CAD, mounting short-term, external debt obligations and changes in the global environment for capital flows. So the cure had little connection with the disease JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    23. 23. Challenges 1. 2. 3. 4. 5. 6. Existence of non monetized sector Excess number of NBFC’s Unorganized financial market Higher liquidity hinders monetary policy Time lag in implementation Lack of coordination between monetary and fiscal policy JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    24. 24. Does the RBI’s monetary policy matter any more? 1. Rate adjustment doesn't bring required changes * Repo rate * Bank borrowing rate Interest rate is a very indirect tool that affects the economy. At present, banks borrow around Rs 40,000 cr from the repo window, and hence even if it is borrowed for the full year, a 1 percentage point change in repo affects their cost by Rs 400 cr, which is not much. 2. While the RBI increased rates or kept them elevated, did it have an impact on inflation? The onion crisis shows that we cannot really argue that inflation has come down because of higher interest rates. evolving and different variety. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    25. 25. 3. Merely lowering interest rates, one cannot bring out growth. 4. Borrowers will come in or move out to have the desired effect even if banks follow the repo rate changes. If demand conditions are low, they will not be interested in borrowing more when rates come down. 5 Here, expectations are important. If companies feel that rates will come down further, they would defer their plans. 6. Foreign factor. Since our economy is an open economy foreign factors are continuously influence on it. Such influences are beyond the preview of monetary policy. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    26. 26. CONCLUSION  Monetary policy can be considered as one of the important tool for managing economic crisis .  Monetary policy’s impact cannot be predicted with cent percentage accuracy.  Monetary policy alone cannot cure the sickness of the economy.  Monetary policy need to coordinate properly with other economic policies. JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    27. 27. References http://en.wikipedia.org/wiki/Economic_policy http://www.investopedia.com/terms/m/monetarypolicy.asp http://economictimes.indiatimes.com/definition/monetary-policy http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=4 %0A http://www.goodreturns.in/classroom/2013/08/why-is-high-current-accountdeficit-cad-bad-for-india-202532.html http://www.financialexpress.com http://in.reuters.com/article/2013/10/29/india-economy-rbi-repo-msfidINDEE99S02M20131029 www.global-rates.com timesofindia.indiatimes.com http://bcom5.blogspot.in/2012/11/instruments-of-monetary-policy.html http://www.oenb.at/en/geldp_volksw/geldpolitik/wirtschaft/how_does_moneta ry_policy_impact_the_economy_.jsp#a16-1740882 JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India
    28. 28. thank you JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India

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