Understanding monetary & fiscal policy

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Basic understanding of Monetary & Fiscal Policy in India

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Understanding monetary & fiscal policy

  1. 1. Understanding Monetary & Fiscal Policy Presented By Anil Nandyala
  2. 2. AGENDA  Why it is important to know ?  RBI’s Roll  Monetary Policy  RBI’s Tools to control Monetary Policy  Factor’s Impacting Monetary Policy  Economic Cycle  Fiscal Policy  Fiscal Policy Tools  Monetary & Fiscal Policy Review
  3. 3. Why it is important to know ?  Decision making  Getting an idea about how country is heading  Measuring the performance  Ex : Fuel Subsidies
  4. 4. RBI’s Role  Monetary Policy  Maintaining price stability and ensuring adequate flow of credit to productive sectors  Regulator & Supervisor of Financial System  Importance of regulating Financial sector  Ex: Saradha chit fund ($ 4-6 billon loss, 1.7M investors)  Ex: Bank-run scenario (ICICI Bank), Lehman Brothers Collapse  Manager of Foreign Exchange  Issuer of Currency  Developmental Role
  5. 5. Monetary Policy  Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment
  6. 6. RBI’s Tools to control Monetary Policy  Cash Reserve Ratio – 4%  Statutory Liquidity Ratio – 23%  Repo – 8%  Reverse Repo – 7%  Marginal Standing Facility Rate – 9%  Open market operations  Ex : US Quantitative Easing ($80 B/M)
  7. 7. Economic Cycle
  8. 8. Factor’s Impacting Monetary Policy  Fiscal Policy not in tandem with Monetary Policy Ex: LPG subsidy  Government spending in subsidies  Much of the Income is spent on needs, unlike the developed economies (per capita income : Rs 5729/month)  Wastage of Vegetables (40%)  Whole sale price index is used as reference
  9. 9. FISCAL POLICY  Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy
  10. 10. Fiscal Policy Tools  Taxation  Vodafone case  Spending  Investment activities  Subsidies
  11. 11. Government Expenditure Breakdown
  12. 12. Impact’s of Bad Fiscal Policy  Fiscal Deficit – crowding out money  Rating downgrade (Lowest Investment Rating)  Currency Depreciation  High Interest rates  Inflation
  13. 13. Monetary & Fiscal policy Review  Monetary Policy  Stringent: One of the few economies not much impacted by Financial crisis  Costs: Availability of the credit  Fiscal Policy     Not Stringent : Not looking in to core problems Ex: Food security bill Population control Education system

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