Monetary and fiscal policies by Neeraj Bhandari ( Surkhet.Nepal )


Published on

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • Dear & Near Money Policy
  • Monetary and fiscal policies by Neeraj Bhandari ( Surkhet.Nepal )

    1. 1. UNIT -4 Monetary and Fiscal Policies
    2. 2. • Monetary policy, is the policy statement through which the Reserve Bank of India seeks to regulate the money supply in the economy • It is announced twice a year– (April-September) & (October-March) Objectives of Monetary Policy • Maintain price stability • Adequate flow of credit to all sectors of the economy. • Exchange Stability • Norms for the banking and financial sector and the institutions which are governed by it. • Ensure overall economic growth RBI : Monetary Policy
    3. 3. Qualitative Rationing of credit Direct action Moral suasion Changes in margin requirements Quantitative OMO s Bank rate SLR CRR
    4. 4. Quantitative Elements Bank Rate-The minimum rate at which RBI extends credit to member Banks . ( 9% as on 17/4/2012) Open Market Operation : It refers to sale and purchase of Govt securities by the RBI Repo Rate: Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) (8% as on 17/4/2012) Reserve Repo Rate: The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. (7% as on 17/4/2012) CRR-The percentage of bank’s deposits which they must keep as cash with RBI (4.5% as on 17/9/2012) SLR-All Bank have to keep a portion of total deposits with itself in liquid assets (23% as on 11/8/2012)
    5. 5. Key Indicator as on 29th Jan. 2013 • Current rate Inflation 4.25% • Bank rate 8.75% • CRR 4.00% • SLR 23% • Repo rate 7.75% • Reverse repo rate 6.75% Source : Reserve Bank of India,
    6. 6. IF THEN Bank Rate Lending capacity of commercial banks reduces Thus Loans become EXPENSIVE Contraction of credit CRR/ SLR Reduces reserves for lending Contracting Credit Bank Rate Banks get loans at cheaper rates Thus even they lend at low interests Expansion of Credit CRR/ SLR More funds with banks So more Credit to the Public
    7. 7. EXPANSIONARY & TIGHT MONETARY POLICY  EXPANSIONARY MONETARY POLICY Problem: Recession and unemployment Measures: • (1) Central bank buys securities through open market operation • (2) It reduces cash reserves ratio • (3) It lowers the bank rate Money supply increases Investment increases Aggregate demand increases Aggregate output increases by a multiple of the increase in investment  TIGHT MONETARY POLICY Problem: Inflation Measures: • (1) Central bank sells securities through open market operation • (2) It raises cash reserve ratio and statutory liquidity • (3) It raises bank rate (4) It raises maximum margin against holding of stocks of goods Money supply decreases Interest rate raises Investment expenditure declines Aggregate demand declines Price level falls
    8. 8. Fiscal Policy  The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue.  Objectives : • Attain full Employment • Increase rate of Investment • Stabilize the general price level • Promote economic growth with equity • Mobilize resources and redistribute income
    9. 9. Instruments of Fiscal Policy Fiscal Policy uses three main instruments : • Taxation • Public Expenditure • Public Debt Management
    10. 10.  Taxation : Direct tax and Indirect taxes • Direct Taxes are levied directly on an individual’s income or wealth . Example of direct taxation include Income tax , corporate tax, wealth tax, capital gains tax etc. Direct taxes are mainly collected by the central government. • Indirect Taxes : Indirect taxes are levied on consumers expenditure or outlay. For e.g Customs duties, motor vehicle tax, excise duty etc. Indirect taxes are collected by both central and state.
    11. 11. Public Expenditure • Expenditure by the govt. may take various forms. It may be normal govt. expenditure on defense, police and public administration . • Planned development including expenditure on roads, parks, expenditure on relief works, subsidies of various kind etc.
    12. 12. Public Debt Management • central and state governments all borrow money to pay for large projects, such as new government buildings, schools or for funding etc. • This forms what is collectively known as the public debt, so- called because it is money that public organizations owe for which the burden of paying rests ultimately with taxpayers. • Public debt may be raised internally or externally.  EXTERNAL DEBT • Bilateral borrowings • Multi lateral borrowings • Loans from international organizations like IMF, World Bank etc.
    13. 13.  INTERNAL DEBT • Market loan • Treasury bills • Bonds • Special securities issue by RBI Ways and Mean Advances ( To meet the short term expenditure) • Special floating and other loans (These represents India's contribution towards share capital of international financial institutions like IMF, World Bank, International Development Agency and so on. )  OTHER INTERNAL LIABILITIES • Small savings (Recently the Government of India launched a number of small savings instruments. These include Relief Bonds 1987, Kisan Vikas Patras, Indira Vikas Patras, etc. )Provident Funds Reserve funds and depositsOther accounts (Postal Insurance and Life Annuity Fund etc.)