Monetary policy

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Monetary policy

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Monetary policy

  1. 1. MONETARY ANDMONETARY ANDFISCAL POLICIESFISCAL POLICIES
  2. 2. InflationInflationInflationInflation is a rise in the generalis a rise in the generallevel of prices of goods andlevel of prices of goods andservices in an economy over aservices in an economy over aperiod of time. When the priceperiod of time. When the pricelevel rises, each unit of currencylevel rises, each unit of currencybuys fewer goods and services.buys fewer goods and services.A chief measure of price inflationA chief measure of price inflationis the inflation rate.When Pricesis the inflation rate.When Pricesrise the Value of Money falls.rise the Value of Money falls.
  3. 3. STAGES OF INFLATIONSTAGES OF INFLATION 1. CREEPING INFLATION (0%-3%)1. CREEPING INFLATION (0%-3%) 2. WALKING INFLATION ( 3% -2. WALKING INFLATION ( 3% -7%)7%) 3. RUNNING INFLATION3. RUNNING INFLATION (10% - 20(10% - 20%)%)
  4. 4. TYPES OF INFLATIONTYPES OF INFLATION1. Demand Pull Inflation1. Demand Pull Inflation2. Cost Push Inflation2. Cost Push Inflation
  5. 5. Causes of InflationCauses of Inflation 1. Demand pull Inflation1. Demand pull InflationCauses for Increase in Demand :-Causes for Increase in Demand :-a)a)Increase in Money SupplyIncrease in Money Supplyb)b)Increase in Black MarketingIncrease in Black Marketingc)c) Increase in HoardingIncrease in Hoardingd)d)Repayment of Past Internal DebtRepayment of Past Internal Debte)e)Increase in ExportsIncrease in Exportsf)f) Deficit FinancingDeficit Financing
  6. 6. Cont……….Cont……….g) Increase in Incomeg) Increase in Incomeh) Demonstration Effecth) Demonstration Effecti) Increase in Black moneyi) Increase in Black moneyj) Increase in Credit facilitiesj) Increase in Credit facilities
  7. 7. Cont….Cont…. 2) Cost Push Inflation2) Cost Push InflationCauses for Increase in Cost :-Causes for Increase in Cost :-a)a)Increase in cost of raw materialsIncrease in cost of raw materialsb)b)Shortage of SuppliesShortage of Suppliesc)c)Natural calamitiesNatural calamitiesd)d)Industrial DisputesIndustrial Disputese)e)Increase in ExportsIncrease in Exportsf)f) Increase in WagesIncrease in Wagesg)g)Increase in Transportation CostIncrease in Transportation Costh)h)Huge Expenditure on AdvertisementHuge Expenditure on Advertisement
  8. 8. Effects of InflationEffects of Inflation Inflation can have positive and negativeInflation can have positive and negativeeffects on an economy. Negative effects ofeffects on an economy. Negative effects ofinflation include loss in stability in the realinflation include loss in stability in the realvalue of money and other monetary itemsvalue of money and other monetary itemsover time; uncertainty about future inflationover time; uncertainty about future inflationmay discourage investment and saving, andmay discourage investment and saving, andhigh inflation may lead to shortages ofhigh inflation may lead to shortages ofgoods if consumers begin hoarding out ofgoods if consumers begin hoarding out ofconcern that prices will increase in theconcern that prices will increase in thefuture. Positive effects include a mitigationfuture. Positive effects include a mitigationof economic recessions, and debt relief byof economic recessions, and debt relief byreducing the real level of debt.reducing the real level of debt.
  9. 9. Cont…..Cont…..1.1. Effect on ProducersEffect on Producers2.2. Effect on DebtorsEffect on Debtors3.3. Effect on CreditorsEffect on Creditors4.4. Effect on Fixed Income GroupEffect on Fixed Income Group5.5. Effect on Wage EarnersEffect on Wage Earners6.6. Effect on Equity HoldersEffect on Equity Holders7.7. Effect on farmersEffect on farmers8.8. Effect on ProdutionEffect on Prodution
  10. 10. 9.Effect on Hoarding9.Effect on Hoarding10.Effect on value of Money10.Effect on value of Money11.Effect on Investment11.Effect on Investment12. Effect on savings12. Effect on savings
  11. 11. What is the MonetaryWhat is the MonetaryPolicy?Policy? The Monetary and Credit Policy is the policyThe Monetary and Credit Policy is the policystatement, traditionally announced twice astatement, traditionally announced twice ayear, through which the Reserve Bank ofyear, through which the Reserve Bank ofIndia seeks to ensure price stability for theIndia seeks to ensure price stability for theeconomy.economy.These factors include - money supply,These factors include - money supply,interest rates and the inflation. In banking andinterest rates and the inflation. In banking andeconomic terms money supply is referred toeconomic terms money supply is referred toas M3 - which indicates the level (stock) ofas M3 - which indicates the level (stock) oflegal currency in the economy.legal currency in the economy.Besides, the RBI also announces norms forBesides, the RBI also announces norms forthe banking and financial sector and thethe banking and financial sector and theinstitutions which are governed by it.institutions which are governed by it.
  12. 12. How is the Monetary PolicyHow is the Monetary Policydifferent from the Fiscaldifferent from the FiscalPolicy?Policy? The Monetary Policy regulates the supply of money and theThe Monetary Policy regulates the supply of money and thecost and availability of credit in the economy. It deals withcost and availability of credit in the economy. It deals withboth the lending and borrowing rates of interest forboth the lending and borrowing rates of interest forcommercial banks.commercial banks. The Monetary Policy aims to maintain price stability, fullThe Monetary Policy aims to maintain price stability, fullemployment and economic growth.employment and economic growth. The Monetary Policy is different from Fiscal Policy as theThe Monetary Policy is different from Fiscal Policy as theformer brings about a change in the economy by changingformer brings about a change in the economy by changingmoney supply and interest rate, whereas fiscal policy is amoney supply and interest rate, whereas fiscal policy is abroader tool with the government.broader tool with the government. The Fiscal Policy can be used to overcome recession andThe Fiscal Policy can be used to overcome recession andcontrol inflation. It may be defined as a deliberate change incontrol inflation. It may be defined as a deliberate change ingovernment revenue and expenditure to influence the levelgovernment revenue and expenditure to influence the levelof national output and prices.of national output and prices.
  13. 13. What are the objectives ofWhat are the objectives ofthe Monetary Policy?the Monetary Policy? The objectives are to maintain price stabilityThe objectives are to maintain price stabilityand ensure adequate flow of credit to theand ensure adequate flow of credit to theproductive sectors of the economy.productive sectors of the economy.Stability for the national currency (afterStability for the national currency (afterlooking at prevailing economic conditions),looking at prevailing economic conditions),growth in employment and income are alsogrowth in employment and income are alsolooked into. The monetary policy affects thelooked into. The monetary policy affects thereal sector through long and variablereal sector through long and variableperiods while the financial markets are alsoperiods while the financial markets are alsoimpacted through short-term implications.impacted through short-term implications.
  14. 14. INSTRUMENTS OFINSTRUMENTS OFMONETARY POLICYMONETARY POLICY 1. Bank Rate of Interest1. Bank Rate of Interest 2. Cash Reserve Ratio2. Cash Reserve Ratio 3. Statutory Liquidity Ratio3. Statutory Liquidity Ratio 4. Open market Operations4. Open market Operations 5. Margin Requirements5. Margin Requirements 6. Deficit Financing6. Deficit Financing 7. Issue of New Currency7. Issue of New Currency 8. Credit Control8. Credit Control
  15. 15. Bank Rate of InterestBank Rate of InterestIt is the interest rate which is fixed by the RBI to control theIt is the interest rate which is fixed by the RBI to control thelending capacity of Commercial banks . During Inflation ,lending capacity of Commercial banks . During Inflation ,RBI increases the bank rate of interest due to whichRBI increases the bank rate of interest due to whichborrowing power of commercial banks reduces whichborrowing power of commercial banks reduces whichthereby reduces the supply of money or credit in thethereby reduces the supply of money or credit in theeconomy .When Money supply Reduces it reduces theeconomy .When Money supply Reduces it reduces thepurchasing power and thereby curtailing Consumption andpurchasing power and thereby curtailing Consumption andlowering Prices.lowering Prices.
  16. 16. Cash Reserve RatioCash Reserve RatioCRR, or cash reserve ratio, refers to a portion ofCRR, or cash reserve ratio, refers to a portion ofdeposits (as cash) which banks have to keep/maintaindeposits (as cash) which banks have to keep/maintainwith the RBI. During Inflation RBI increases the CRRwith the RBI. During Inflation RBI increases the CRRdue to which commercial banks have to keep a greaterdue to which commercial banks have to keep a greaterportion of their deposits with the RBI . This serves twoportion of their deposits with the RBI . This serves twopurposes. It ensures that a portion of bank deposits ispurposes. It ensures that a portion of bank deposits istotally risk-free and secondly it enables that RBI controltotally risk-free and secondly it enables that RBI controlliquidity in the system, and thereby, inflation.liquidity in the system, and thereby, inflation.
  17. 17. Statutory LiquidityStatutory LiquidityRatioRatioBanks are required to invest a portion ofBanks are required to invest a portion oftheir deposits in government securitiestheir deposits in government securitiesas a part of their statutory liquidity ratioas a part of their statutory liquidity ratio(SLR) requirements . If SLR increases(SLR) requirements . If SLR increasesthe lending capacity of commercial banksthe lending capacity of commercial banksdecreases thereby regulating the supplydecreases thereby regulating the supplyof money in the economy.of money in the economy.
  18. 18. Open marketOpen marketOperationsOperationsIt refers to the buying and selling ofIt refers to the buying and selling ofGovt. securities in the open market .Govt. securities in the open market .During inflation RBI sells securities in theDuring inflation RBI sells securities in theopen market which leads to transfer ofopen market which leads to transfer ofmoney to RBI.Thus money supply ismoney to RBI.Thus money supply iscontrolled in the economy.controlled in the economy.
  19. 19. Margin RequirementsMargin Requirements During Inflation RBI fixes a high rate ofDuring Inflation RBI fixes a high rate ofmargin on the securities kept by themargin on the securities kept by thepublic for loans .If the margin increasespublic for loans .If the margin increasesthe commercial banks will give lessthe commercial banks will give lessamount of credit on the securities kept byamount of credit on the securities kept bythe public thereby controlling inflation.the public thereby controlling inflation.
  20. 20. Deficit FinancingDeficit Financing It means printing of new currency notesIt means printing of new currency notesby Reserve Bank of India .If more newby Reserve Bank of India .If more newnotes are printed it will increase thenotes are printed it will increase thesupply of money thereby increasingsupply of money thereby increasingdemand and prices.demand and prices. Thus during Inflation, RBI will stopThus during Inflation, RBI will stopprinting new currency notes therebyprinting new currency notes therebycontrolling inflation.controlling inflation.
  21. 21. Issue of New CurrencyIssue of New Currency During Inflation the RBI will issue newDuring Inflation the RBI will issue newcurrency notes replacing many oldcurrency notes replacing many oldnotes.notes.This will reduce the supply of money inThis will reduce the supply of money inthe economy.the economy.
  22. 22. Fiscal PolicyFiscal Policy It refers to the Revenue and ExpenditureIt refers to the Revenue and Expenditurepolicy of the Govt. which is generallypolicy of the Govt. which is generallyused to cure recession and maintainused to cure recession and maintaineconomic stability in the country.economic stability in the country.
  23. 23. Instruments of FiscalInstruments of FiscalPolicyPolicy 1. Reduction of Govt. Expenditure1. Reduction of Govt. Expenditure 2. Increase in Taxation2. Increase in Taxation 3. Imposition of new Taxes3. Imposition of new Taxes 4. Wage Control4. Wage Control 5.Rationing5.Rationing 6. Public Debt6. Public Debt 7. Increase in savings7. Increase in savings 8. Maintaining Surplus Budget8. Maintaining Surplus Budget
  24. 24. Other MeasuresOther Measures 1. Increase in Imports of Raw materials1. Increase in Imports of Raw materials 2. Decrease in Exports2. Decrease in Exports 3. Increase in Productivity3. Increase in Productivity 4. Provision of Subsidies4. Provision of Subsidies 5. Use of Latest Technology5. Use of Latest Technology 6. Rational Industrial Policy6. Rational Industrial Policy

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