RELATED TO INDIAN ECONOMY

1. ECONOMIC POLICY

2. Economic policies
 Economic policy refers to the actions that
government takes in the economic field.
 It covers the system for setting levels of taxation,
government budgets, money supply and interest
rates .
 Most factors of economic policy can be divided either
into fiscal policy or monetary policy.

3. Economic policies are…
 Industrial policy 1991
 Monetary policy
 Recent EXIM policy 2002-2007
 Fiscal policy

4. Monetary policy
 Monetary policy is an integral part of the overall
economic policy of the govt. and in modern times it
plays an important role in the analysis of the
problems of economic stability and economic
growth.
 Monetary policy includes all those measures which
affects the total volume and value of money in the
economy.

5. Objectives
 The nature and objectives of monetary policies in
underdeveloped and developing countries like India
are basically different from what they are in the
developed countries.
 The major problem of the developing countries is not
economic stability but economic growth.

6.  These countries suffers from low income level, low
level of employment and low capital information.
 Monetary policy in these countries therefore, has to
work for raising the level of income and providing
more employment.

7.  The main objective of monetary policy , thus is to
accelerate the rate of economic growth and to act as
an agent of economic growth.
 Maintaining stability in the domestic price level and
stability in exchange rate are important pre-
requisites for achieving maximum growth rate.

8.  The major objectives of the monetary policies are :
 1) to promote capital formation and provide
finance for the economic development.
 2) to regulate the bank credit
 3) to encourage the monetisation in the economy
and to coordinate different sectors of the money
market.

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 4) to achieve growth with stability
.
 5) to maintain equilibrium in the balance of
payments.

10. To promote capital formation and provide
finance for economic development
 A major objective of the monetary policy is to
provide the needed finance for the rapidly growing
sectors of the economic sectors of the economy.
 Monetary policy has to be so geared as to meet the
financial requirements of the developing segments of
the economy.
 This aspect of providing finance for economic
development is known as the positive or
“promotional role ” of the monetary policy.

11. To regulate the bank credit
 Here the objective is to regulate the volume of bank
credit in the economy in a manner that it does not
result either overexpansion or undue contraction.
 This implies effective control over the lending
policies of the commercial banks.
 This aspect of regulating bank credit is known as the
regulatory role of monetary policy.

12. To encourage monestisation in the economy and
to coordinate different sector of money market
the third objective of the monetary policy is to
accelerate the process of monetisation of the
economy because now it has come to be realized that
the existence of the non-monestised sector is
obstructive to rapid economic growth.
similarly , the existence of the unorganized sector is
lacuna in the Indian money market because it
reduces the effectiveness of monetary policy.

13. To achieve economic growth with stability
 A developing economy like India is very easily
exposed to the generation of inflationary pressures.
 It has now come to be widely accepted that inflation
is not conductive but obstructive to the process of
economic growth.
 The objective of the monetary policy therefore ,
should be to contain inflationary pressure and attain
economic growth with stability.

14. To maintain equilibrium in the balance of
payments
 Developing countries generally face balance of
payments difficulties at least in the initial stages of
development because of high import bill and low
growth rate of exports.
 By using the direct method of exchange control
like bank rate , monetary policy can play important
role in correcting the disequilibrium in the balance of
payment.

15. Tools of monetary policy
 Monetary policy in India is generally implemented
by the central bank of the country.
 As the regulations and control of currency is
concerned , there is practically no difficulty because
the central bank has the sole right to issue currency
notes and therefore can regulate the same;

16.  In order to regulate the volume of credit it uses:
 (1) General method of credit control or quantitative
method of credit control.
 (2) Selective method of credit control or Qualitative
method of credit control

17. General method of credit control
General method of credit control aims at influencing
the total volume of credit in the economy without
any regard to use for which it is put .

18. General method of credit control includes..

19. Bank Rate Policy
 Bank rate is the rate at which the central bank of the
country is willing to discount first class bills of
exchange and advance loans against approved
securities to the commercial bank.
 It is also known as “lending rate ” or “discount
rate” of the central bank.
 Bank rate affects both the cost and availability of the
credit.

20. Modus operandi of the bank rate
 If the commercial bank are pursuing an expansionist
credit policy, which the central bank considers the
harmful for the economy , then in such situation the
central bank will raise its bank rate.
 With an increase in bank rate commercial bank too
will raise the lending rates , because they have to pay
higher rate to borrow from the central bank. Besides
other interest rates in the market will also go up.

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 This will naturally lead to rise in the cost of bank
credit leading ultimately to reduced borrowing from
the side of trade , commerce and industry.
 Thus a rise in the cost borrowing will result in
contraction of credit.

22. Conditions for the success of Bank Rate Policy
 The following are the main conditions for the
successful operations of bank rate policy :
 (1) There should be a close relationship between
bank rates and rates of interest prevailing in the
money market.

23.  (2) The structure of economy must be elastic enough
so that any change in bank rate must lead changes in
the structure of wages , prices and costs.
 (3) The country should have a well developed and
well organised money market.

24. Bank Rate Policy In India
 The bank rate policy has been defined in section 49
of the Reserve Bank of India Act 1934 , as ,
 “the standard rate at which it is prepared to
buy or rediscount bills of exchange or other
commercial papers eligible for purchase under this
act.”

25.  It may be mentioned that the reserve bank as a part
of its monetary policy to control credit has been
making use of bank rate , repo rate and reverse repo
rate policy.
 REPO (repurchase ) rate is the rate at which the RBI
lends short term money to the bank against
securities.(current 6.5%)
 Reverse repo rate is the rate at which the RBI
borrows from banks.(current 6%)
 At 1935 BOD had fixed bank rate as 3.5%

26.  Since then till this day , the reserve bank has changed the bank rate 30
times of which 17 occasions it has been raised the bank rate while on 13
occasions it has been reduced the bank rate.
 The last change in the bank rate was made in April,2012 when it was
fixed as 9.0% and since then till July 2012 the bank rate has been
maintained @ 9.0% level.( current bank rate is 7% 29/9/2015)
 ANTI-INFLATIONARY MEANS ANY POLICY A CENTRAL BANK OR
OTHER AGENCY TAKES TO REDUCE INFLATION RATE.

27.  Bank rate policy in India has been used by and large ,
as integral part of anti-inflationary policy and it is
also mentioned that changes made in bank rate were
less frequent.
 Anti inflationary includes thing like to cut down
money supply , price control raising interest rate

28. Evaluation Of Bank Rate Policy
 (1) the efficacy of the bank rate as a policy of
instrument depends essentially upon the commercial
bank dependence on the reserve bank for funds and
influence it wields on other interest rate.
 (2) There is virtual absence of a well organised and
well -coordinated money market in the country . The
Indian Money Market has been characterised by its
dichotomy into modern banking system and the
indigenous banking system.

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 (3) the non-availability of eligible short terms assets
for rediscount in adequate quantity makes the bank
less effective.
 (4) the predominance of the currency over credit and
the habit of keeping surplus cash reserve over and
above the minimum legal requirements by the
commercial banks also reduce the need for seeking
financial accommodation from the reserve bank.

30.  (5) in the context of inflationary situation , when
profit expectations are high , a rise in the bank rate
and consequent rise in the interest rates hardly act as
a deterrent for the businessmen. It has been said that
borrowings during times of inflation are interest
inelastic.

31. Repo rate and reverse repo rate
 Apart from bank rate the RBI is using repo rate and
reverse repo rate as instrument to regulate the
money supply in the economy and thereby maintain
monetary stability.
 REPO (repurchase ) rate is the rate at which the RBI
lends short term money to the bank for short period.
(current 6.5%)
 The repo rate which was 5% prior to April 2010 was
progressively increased to 8.50% in October 2011.

32.  This was done to control inflationary pressure in the
economy .
 Then it reduced to 8% in April 2012 and since July
2012 it was maintained at the level of 8%. Then it
reduced to 7.25% since June 2015 and currently its
6.50%.

33.  Reverse repo rate is the rate at which the RBI
borrows from banks. It is the bench- mark in the
money market.
 April 2010 it was 3.5% raised to 7.50% in October
2011 and then to 8% then it reduced to 7% in 2012
and currently it is 6%.

34. (B) Open Market Operation
 To regulate the flow of money in the economy ,
another tool is open market operation.
 Here RBI regulates the flow of money by purchasing
and selling the securities.
 In inflationary situation RBI issues securities that
will be purchased by people or financial institutions
that again reduces the money supply in the economy.
 The same as with in deflation RBI purchases the
securities from open market it again increases
money supply in the economy . Thus RBI raises
economic stability.

35. Cash Reserve Ration
 Every commercial banks requires to keep certain
amount of cash reserve with them as decided by the
RBI.
 Change in CRR also changes credit creation capacity
of commercial banks.
 CRR and credit creation capacity are having inverse
relationship.
 In the case of inflation RBI increases the % of CRR.

36.  It means commercial banks are required to keep
more amount as a cash reserve. It reduces the credit
creation capacity of commercial banks. That again
reduces the flow of cash in the economy.
 On the other hand , RBI reduces the % of CRR that
again increases the credit creation capacity of the
commercial banks and the flow of cash in the
economy that raises the economic stability.

37. Qualitative Credit Control Tools
 When RBI wants to regulate the flow of cash of
selected areas or field , RBI uses qualitative or the
selective credit control tools.
 (A) MARGIN REQUIREMENT :
generally commercial banks
provides financial resources against securities. But
commercial banks do not provide the financial
resources equals to market value of the securities.

38. But commercial banks provide financial resources of
certain % of securities by keeping certain % of
margin to be on the safe side. In case of inflation RBI
increases margin requirements and decreases in the
situation of deflation.

39.  (B) Regulation of consumer credit:
generally commercial bank provides
financial resources for different purposes in the form
of consumer credit.
In case of inflation commercial
banks cut off the finance provided for the different
purposes and may extend the limit in the case of
deflation.