MANAGERIAL ECONOMICS    MONETARY POLICY
MONETARY POLICY• Monetary policy deals with the total money  supply and its management in an economy. It  is essentially a...
MONETARY POLICY OBJECTIVES• Price stability• Exchange rate stability• Avoidance of negative impact of business  cycle• Ach...
MONETARY POLICY OBJECTIVES               Contd…•   Financial stability•   Rapid economic growth•   BOP equilibrium•   Equa...
INSTRUMENTS•   Bank Rate•   Cash Reserve Ratio (CRR)•   Statutory Liquidity Ratio (SLR)•   Open Market Operations•   Margi...
LIMITATIONS OF MONETARY POLICY            MEASURES• Existence of non-monetized sector (unbanked,  barter transactions)• Ex...
MONETARY POLICY IN 2011-12• Inflation pressures in I half year• Up to mid Dec. 2011, monetary policy stance  continued to ...
MONETARY POLICY IN 2012-13• Growing evidence of slowdown in economy• SLR was reduced in July 12 to provide liquidity to  f...
MOVEMENTS IN KEY POLICY             VARIABLES•   Effective     Repo Rate      CRR         SLR•   May 3, 2011 7.25 (+0.50) ...
MOVEMENTS IN KEY POLICY           VARIABLES Contd…•   Effective    Repo Rate CRR          SLR•   Mar.10, 2012 8.50       4...
FISCAL POLICY• Fiscal policy is defined as the conscious  attempt of the government to achieve certain  macro economic goa...
OBJECTIVES OF FISCAL POLICY•   Economic stability•   Price stability•   Full employment•   Social justice•   Export promot...
INSTRUMENTS• Taxation• Public borrowing• Deficit financing
CLASSIFICATION OF EXPENDITURE• Capital expenditure• Consumption expenditure
TYPES OF EXPENDITURE•   Construction of roads, dams, etc.•   Establishment expenses•   Interest payments•   Transfer payme...
BUDGET 2012-13• KEY FEATURES• GDP estimated to grow by 6.9% during 2011-  12 as against 8.4% in the preceding 2 years• Gro...
BUDGET ESTIMATES 2012-13•   Gross tax receipts 10,77,612 cr•   Net tax to Centre 7.71,071 cr•   Non-tax revenue receipts 1...
MAJOR TAX PROPOSALS ON DIRECT             TAXES• Exemption limit for individual tax payers  enhanced from Rs. 1.80 lacs to...
ECONOMIC ENVIRONMENT AND       TRANSITION IN INDIA• INTRODUCTION• Economic growth is the foremost objective of  macroecono...
SOURCES OF ECONOMIC GROWTH         AND DEVELOPMENT• ECONOMIC FACTORS• Natural resources• Human resource and population gro...
SOURCES OF ECONOMIC GROWTH      AND DEVELOPMENT Contd…•   NON-ECONOMIC FACTORS•   Desire for development•   Widespread edu...
BARRIERS TO FASTER ECONOMIC               GROWTH•   Low productivity•   Infrastructure deficiencies•   Rising public debt•...
GROWTH POTENTIAL•   Large potential market•   Booming IT and Bio-tech sectors•   High professional and scientific manpower...
LIBERALISATION, PRIVATISATION AND           GLOBALISATION (LPG)•   NEED FOR LIBERLISATION•   Low economic growth•   Low pe...
LIBERALISATION, PRIVATISATION AND       GLOBALISATION (LPG) Contd…•   NEED FOR LIBERLISATION Contd…•   Mismanagement of ec...
LIBERALISATION• Disinvestment• De-licensing• FDI allowed up to 51%• No permission required for hiring foreign  professiona...
LIBERALISATION                   Contd…• Deregulation and liberalization of the industries• Lowering of tariffs and easing...
LIBERALISATION                  Contd…• Liberalization of banking and financial sectors• Promotion of FDI• Tax incentives ...
WEAKNESSES OF LPG MODEL•   Narrow focus•   Free entry of MNCs•   Agricultural sector bypassed•   Facilitated more imports•...
PRIVATISATION• Sale of part of nationalized industries to the  private sector• Sale of individual assets of government bod...
ARGUMENTS IN FAVOUR OF          PRIVATIZATION• Reduction in cost of production due to productive  efficiency• Quality enha...
GLOBALIZATION• Globalization means integrating the domestic  economy with the world economy• Globalization is a process of...
STEPS TO OVERCOME CHALLENGES OF          GOBALIZATION•   Human resources development•   Enhancing quality of products•   I...
EFFECT OF GLOBALIZATION ON        INDIVIAN ECONOMY• India’s share in world export increased from  0.53% in 1950 TO 1% in 2...
UPSHOT OF GLOBALIZATION•   Unprecedented economic growth•   Multi-locational manufacturing•   Surge in international trade...
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Monetary policy

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Monetary policy

  1. 1. MANAGERIAL ECONOMICS MONETARY POLICY
  2. 2. MONETARY POLICY• Monetary policy deals with the total money supply and its management in an economy. It is essentially a program of action undertaken by central bank of a country to control and regulate the supply of money with the public and the flow of credit with a view to achieve economic goals.
  3. 3. MONETARY POLICY OBJECTIVES• Price stability• Exchange rate stability• Avoidance of negative impact of business cycle• Achievement of full employment• Adequate flow of credit to various productive sectors • Contd…
  4. 4. MONETARY POLICY OBJECTIVES Contd…• Financial stability• Rapid economic growth• BOP equilibrium• Equal income distribution
  5. 5. INSTRUMENTS• Bank Rate• Cash Reserve Ratio (CRR)• Statutory Liquidity Ratio (SLR)• Open Market Operations• Margin requirements• Credit Rationing• Moral Suasion• Direct actions
  6. 6. LIMITATIONS OF MONETARY POLICY MEASURES• Existence of non-monetized sector (unbanked, barter transactions)• Excess non-banking financial institutions (not coming under monetary policy)• Existence of unorganized financial markets (Rural money lenders)• Excess liquidity (rapid economic growth, deposits keep increasing, excess liquidity cannot be sucked)• Monetary and Fiscal Policies lack co-ordination
  7. 7. MONETARY POLICY IN 2011-12• Inflation pressures in I half year• Up to mid Dec. 2011, monetary policy stance continued to be tight• By Dec. 2011, inflationary level started easing but, domestic growth started slowing down• Policy rates were kept at a pause during the reminder of the year
  8. 8. MONETARY POLICY IN 2012-13• Growing evidence of slowdown in economy• SLR was reduced in July 12 to provide liquidity to facilitate availability of credit to productive sectors• CRR was cut• RBI resorted to open market operations• April 2011 to November 2011 WPI inflation at 9.7%• Non-food inflation 7.7% as against 4% during the last 6 years• Repo rate increased 5 times totaling 175 basis point• Inflation continues to be above comfortable level
  9. 9. MOVEMENTS IN KEY POLICY VARIABLES• Effective Repo Rate CRR SLR• May 3, 2011 7.25 (+0.50) 6 24• June 16, 2011 7.50(+0.25) 6 24• July 26, 2011 8.00 (+0.50) 6 24• Sept.16, 2011 8.25(+0.25) 6 24• Oct. 25, 2011 8.50(+0.25) 6 24• Jan.28, 2012 8.50 5.50(-0.50)24
  10. 10. MOVEMENTS IN KEY POLICY VARIABLES Contd…• Effective Repo Rate CRR SLR• Mar.10, 2012 8.50 4.75(-0.75)24• Apr.17, 2012 8.00(-0.50)4.75 24• June 18, 2012 8.00 4.75 24• Aug.11, 2012 8.00 4.75 23 (- 1)• Sept.22, 2012 8.00 4.50(-0.25)• Nov.3, 2012 8.00 4.25(-0.25)
  11. 11. FISCAL POLICY• Fiscal policy is defined as the conscious attempt of the government to achieve certain macro economic goals by altering the volume and pattern of its revenue and expenditure
  12. 12. OBJECTIVES OF FISCAL POLICY• Economic stability• Price stability• Full employment• Social justice• Export promotion• Import substitution• Mobilization of more public revenue• Allocation of available resources• Balanced regional growth
  13. 13. INSTRUMENTS• Taxation• Public borrowing• Deficit financing
  14. 14. CLASSIFICATION OF EXPENDITURE• Capital expenditure• Consumption expenditure
  15. 15. TYPES OF EXPENDITURE• Construction of roads, dams, etc.• Establishment expenses• Interest payments• Transfer payments
  16. 16. BUDGET 2012-13• KEY FEATURES• GDP estimated to grow by 6.9% during 2011- 12 as against 8.4% in the preceding 2 years• Growth moderated• Fiscal balance deteriorated due to tight monetary policy and expanded outlays• Manufacturing sector under recovery phase
  17. 17. BUDGET ESTIMATES 2012-13• Gross tax receipts 10,77,612 cr• Net tax to Centre 7.71,071 cr• Non-tax revenue receipts 1,64,614 cr• Non-debt capital receipts 41,650 cr• Total expenditure 14,90,925 cr• Plan expenditure 5,21,025 cr• Non-plan expenditure 9,69,900 cr• Transfer to States 3,65,216 cr• Fiscal deficit reduction from 5.9% to 5.1% of GDP
  18. 18. MAJOR TAX PROPOSALS ON DIRECT TAXES• Exemption limit for individual tax payers enhanced from Rs. 1.80 lacs to Rs.2 lacs• Upper limit of 20% tax slab raised from Rs. 8 lacs to Rs. 10 lacs• Interest income from Savings Bank Account exempted from tax up to Rs.10,000/
  19. 19. ECONOMIC ENVIRONMENT AND TRANSITION IN INDIA• INTRODUCTION• Economic growth is the foremost objective of macroeconomic policies• Higher the economic growth, higher the national income• Higher national income will help solve problems of poverty, unemployment, inflation and international trade
  20. 20. SOURCES OF ECONOMIC GROWTH AND DEVELOPMENT• ECONOMIC FACTORS• Natural resources• Human resource and population growth• Capital formation• Technological progress• Entrepreneurship• Investment policies• Removal of market imperfections (reducing monopoly market)• Capital output ratio
  21. 21. SOURCES OF ECONOMIC GROWTH AND DEVELOPMENT Contd…• NON-ECONOMIC FACTORS• Desire for development• Widespread education• Social and industrial reform• Good governance
  22. 22. BARRIERS TO FASTER ECONOMIC GROWTH• Low productivity• Infrastructure deficiencies• Rising public debt• High subsidies fostering inefficiency• Low literacy levels• Demographic deficiencies• Rigid labor laws• Functioning of judicial system• Campaign against consumerism• Corruption
  23. 23. GROWTH POTENTIAL• Large potential market• Booming IT and Bio-tech sectors• High professional and scientific manpower• Trend towards political decentralization• Dominant player in South Asian region• Competitive environment
  24. 24. LIBERALISATION, PRIVATISATION AND GLOBALISATION (LPG)• NEED FOR LIBERLISATION• Low economic growth• Low per capita income• Less than 1% share in world trade• Trade deficit• Heavy government borrowing• Inefficiency in use of resources • Contd…
  25. 25. LIBERALISATION, PRIVATISATION AND GLOBALISATION (LPG) Contd…• NEED FOR LIBERLISATION Contd…• Mismanagement of economy• PSU losses• Poor technological development• Shortage of foreign exchange• Burden of national debt• Inflationary pressures
  26. 26. LIBERALISATION• Disinvestment• De-licensing• FDI allowed up to 51%• No permission required for hiring foreign professionals• BIFR for PSUs• Greater autonomy to PSUs• Economy opened up • Contd…
  27. 27. LIBERALISATION Contd…• Deregulation and liberalization of the industries• Lowering of tariffs and easing of import licensing requirements• Export incentives• Promotion of SEZs• Single window licensing policy• Declining incidence of poverty• Divestment of PSUs • Contd…
  28. 28. LIBERALISATION Contd…• Liberalization of banking and financial sectors• Promotion of FDI• Tax incentives for capital investments• Managed exchange rate in place of controlled exchange rate• Portfolio investment strengthened
  29. 29. WEAKNESSES OF LPG MODEL• Narrow focus• Free entry of MNCs• Agricultural sector bypassed• Facilitated more imports• Capital intensive development
  30. 30. PRIVATISATION• Sale of part of nationalized industries to the private sector• Sale of individual assets of government bodies to private sector• Creation of competitive spirit of the private sector to the state enterprises• Disinvestment – disposal of equity in PSUs to private sector
  31. 31. ARGUMENTS IN FAVOUR OF PRIVATIZATION• Reduction in cost of production due to productive efficiency• Quality enhancement due to R & D• Innovation• Invisible hand of the market ensuring optimal allocation of resources• Widening of share ownership• Reduction in public borrowing and state spending
  32. 32. GLOBALIZATION• Globalization means integrating the domestic economy with the world economy• Globalization is a process of integration of the world into one market by removal of all the political, geographical trade and business barriers among nations.
  33. 33. STEPS TO OVERCOME CHALLENGES OF GOBALIZATION• Human resources development• Enhancing quality of products• Improving marketing strategies• Attracting FDI• Improving good governance• Evolving risk management strategies
  34. 34. EFFECT OF GLOBALIZATION ON INDIVIAN ECONOMY• India’s share in world export increased from 0.53% in 1950 TO 1% in 2005• Foreign exchange reserve improved• Export growth rate increased (Maximum of 20% per annum)• Reduction in current account deficit (3% to 1.1%)• Reduction in external debt crisis
  35. 35. UPSHOT OF GLOBALIZATION• Unprecedented economic growth• Multi-locational manufacturing• Surge in international trade• Explosive growth in capital movements• Increase in labor movement• Emergency of cultural commonalities

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