21558116 Monetary Policy1

8/8/2019 21558116 Monetary Policy1

1/34

MONETARY AND FISCALPOLICYMONETARY AND FISCALPOLICY

PRESENTED BYPRESENTED BYRISHI SINGHRISHI SINGH

GURLEEN KAURGURLEEN KAUR

KAMINI JAINKAMINI JAIN

SUMIT SONISUMIT SONIAMBESH KUMARAMBESH KUMAR

KIRANDEEP JATTANAKIRANDEEP JATTANA


2/34


3/34

ContentsContents` IntroductionIntroduction` ObjectivesObjectives

` Instruments of Monetary PolicyInstruments of Monetary Policy

xx Quantitative MeasuresQuantitative Measures

xx Qualitative MeasuresQualitative Measures

` Controlling InflationControlling Inflation


4/34

INTRODUCTIONINTRODUCTION

Monetary Policy is essentially a program of actionMonetary Policy is essentially a program of actionundertaken by the Monetary Authorities, generally theundertaken by the Monetary Authorities, generally the

Central Bank, to control and regulate the supply ofCentral Bank, to control and regulate the supply of

money with the public and the flow of credit with a viewmoney with the public and the flow of credit with a view

to achieving preto achieving pre--determined macrodetermined macro--economics goals.economics goals.

At the time of inflation monetary policy seeks toAt the time of inflation monetary policy seeks tocontract aggregate spending by tightening the moneycontract aggregate spending by tightening the money

supply or raising the rate of return.supply or raising the rate of return.


5/34

ContentsContents` IntroductionIntroduction` ObjectivesObjectives






6/34

OBJECTIVESOBJECTIVES

To achieve price stability by controlling inflation andTo achieve price stability by controlling inflation and

deflation.deflation.

To promote and encourage economic growth in theTo promote and encourage economic growth in theeconomy.economy.

ToTo ensureensure thethe economiceconomic stabilitystability atat fullfull employmentemployment oror

potentialpotential levellevel ofof outputoutput..


7/34

ContentsContents` IntroductionIntroduction

` ObjectivesObjectives






8/34

TheThe openopen marketmarket operationsoperations isis salesale andand purchasepurchase ofof governmentgovernment securitiessecuritiesandand TreasuryTreasury BillsBills byby thethe centralcentral bankbank ofof thethe countrycountry..

WhenWhen thethe centralcentral bankbank decidesdecides toto pumppump moneymoney intointo circulation,circulation, itit buysbuysbackback thethe governmentgovernment securities,securities, billsbills andand bondsbonds..

WhenWhen itit decidesdecides toto reducereduce moneymoney inin circulationcirculation itit sellssells thethe governmentgovernmentbondsbonds andand securitiessecurities..

TheThe centralcentral bankbank carriescarries outout itsits openopen marketmarket operationsoperations throughthrough thethe

commercialcommercial banksbanks..


9/34

` DiscountDiscount raterate oror bankbank raterate isis thethe raterate atat whichwhich centralcentral bankbank

rediscountsrediscounts thethe billsbills ofof exchangeexchange presentedpresented byby thethe commercialcommercial

bankbank..

` TheThe centralcentral bankbank cancan changechange thisthis raterate increaseincrease oror decreasedecrease

dependingdepending onon whetherwhether itit wantswants toto expandexpand oror reducereduce thethe flowflow ofof

creditcredit fromfrom thethe commercialcommercial bankbank..


10/34

AA riserise inin thethe discountdiscount raterate reducesreduces thethe netnet worthworth of of thethegovernmentgovernment bondsbonds againstagainst whichwhich commercialcommercial banksbanks borrowborrow fundsfunds

fromfrom thethe centralcentral bankbank.. ThisThis reducesreduces commercialcommercial banksbanks capacitycapacity toto

borrowborrow fromfrom thethe centralcentral bankbank..

WhenWhen thethe centralcentral bankbank raisesraises itsits discountdiscount rate,rate, commercialcommercial banksbanksraiseraise theirtheir discountdiscount raterate tootoo.. RiseRise inin thethe discountdiscount raterate raisesraises thethe

costcost ofof bankbank creditcredit whichwhich discouragesdiscourages businessbusiness firmsfirms toto getget theirtheir

billbill ofof exchangeexchange discounteddiscounted..


11/34

TheThe cashcash reservereserve ratioratio isis thethe percentagepercentage ofof totaltotal depositsdeposits whichwhichcommercialcommercial banksbanks areare requiredrequired toto maintainmaintain inin thethe formform ofof cashcash

reservereserve withwith thethe centralcentral bankbank..

TheThe objectiveobjective ofof cashcash reservereserve isis toto preventprevent shortageshortage ofof cashcash forfor

meetingmeeting thethe cashcash demanddemand byby thethe depositorsdepositors..

ByBy changingchanging thethe CRR,CRR, thethe centralcentral bankbank cancan changechange thethe moneymoneysupplysupply overnightovernight..

WhenWhen economiceconomic conditionsconditions demanddemand aa contractionarycontractionary monetarymonetary

policy,policy, thethe centralcentral bankbank raisesraises thethe CRRCRR.. AndAnd whenwhen economiceconomicconditionsconditions demanddemand monetarymonetary expansionexpansion ,the,the centralcentral bankbank cutscuts

downdown thethe CRRCRR..


12/34

InIn IndiaIndia ,the,the RBIRBI hashas imposedimposed anotheranother reservereserve requirementrequirement ininadditionaddition toto CRRCRR.. ItIt isis calledcalled statutorystatutory liquidityliquidity requirementrequirement..

TheThe SLRSLR isis thethe proportionproportion ofof thethe totaltotal depositsdeposits whichwhich commercialcommercialbanksbanks areare statutorilystatutorily requiredrequired toto maintainmaintain inin thethe formform ofof liquidliquid

assetsassets inin additionaddition toto cashcash reservereserve ratioratio..


13/34








14/34

The banks provide loans only up to a certain percentage of theThe banks provide loans only up to a certain percentage of the

value of the mortgaged property.value of the mortgaged property.

The gap between the value of the mortgaged property and amountThe gap between the value of the mortgaged property and amountadvanced is called Lending Margin.advanced is called Lending Margin.

The central bank is empowered to increase the lending marginThe central bank is empowered to increase the lending margin

with a view to decrease the bank credit.with a view to decrease the bank credit.


15/34

` The moral suasion is a method of persuading and convincing theThe moral suasion is a method of persuading and convincing the

commercial banks to advance credit in accordance with thecommercial banks to advance credit in accordance with the

directives of the central bank in overall economic interest of thedirectives of the central bank in overall economic interest of the

country.country.

` Under this method the central bank writes letter to hold meetingsUnder this method the central bank writes letter to hold meetings

with the banks on money and credit matterswith the banks on money and credit matters.


16/34








17/34

` An Expansionary Policy increases the total supply of money in theAn Expansionary Policy increases the total supply of money in the

economy while a Contractionary Policy decreases the total moneyeconomy while a Contractionary Policy decreases the total money

Supply into the market.Supply into the market.

` Expansionary policy is traditionally used to combat a recession byExpansionary policy is traditionally used to combat a recession bylowering interests rates.lowering interests rates.

` Lowered interest rates means lower cost of credit which inducesLowered interest rates means lower cost of credit which induces

people to borrow and spend thereby providing steam to variouspeople to borrow and spend thereby providing steam to various

industries and kick start a slowing economy.industries and kick start a slowing economy.


18/34

` A Contractionary Policy results in increasing interest rates toA Contractionary Policy results in increasing interest rates to

combat inflation.combat inflation.

` An Economy growing in an uninhibited manner leads to inflationAn Economy growing in an uninhibited manner leads to inflation

` Hence increasing interest rates increase the cost of credit therebyHence increasing interest rates increase the cost of credit thereby

making people borrow less.making people borrow less.` Due to lesser borrowing the amount of money in the systemDue to lesser borrowing the amount of money in the system

reduces which in turn brings down inflation.reduces which in turn brings down inflation.

` A Contractionary Policy is also known as TIGHT POLICY as itA Contractionary Policy is also known as TIGHT POLICY as it

tightens the flow of money in order to contain Inflationary forces.tightens the flow of money in order to contain Inflationary forces.


19/34

` The RBI makes an adjustment in its lending rate(Repo Rates) inThe RBI makes an adjustment in its lending rate(Repo Rates) in

order to influence the cost of credit. Thereby discouragingorder to influence the cost of credit. Thereby discouraging

borrowing and hence reduces brings reduction in the system.borrowing and hence reduces brings reduction in the system.


20/34

` Whenever the liquid in the system increases, the RBI intervenes toWhenever the liquid in the system increases, the RBI intervenes to

stabilize the system.stabilize the system.

` The Central Bank does this by issuing fresh bonds and treasury billsThe Central Bank does this by issuing fresh bonds and treasury bills

in open market. This tool was extensively used at the time whenin open market. This tool was extensively used at the time whendollar inflows into our economy were very high, resulting in rupeedollar inflows into our economy were very high, resulting in rupee

appreciating. In order to stabilize the exchange rates, RBI firstappreciating. In order to stabilize the exchange rates, RBI first

bought additional dollars thereby stabilizing the rate of exchange.bought additional dollars thereby stabilizing the rate of exchange.


21/34

` CRRCRR--

` By increasing the CRR, the RBI decreases the lending capacity ofBy increasing the CRR, the RBI decreases the lending capacity of

the bank to the extent of the increase in the ratiothe bank to the extent of the increase in the ratio.` E.g. of the CRR is increased from 7.5% to 8.5% the banks wereE.g. of the CRR is increased from 7.5% to 8.5% the banks were

deprived of lending to the extent of 75 basis points of their depositdeprived of lending to the extent of 75 basis points of their deposit

valuevalue.


22/34


23/34





` Monetary Policy of IndiaMonetary Policy of India


24/34

` he most important instrument of government

intervention in the country is that of Fiscal or

Budgetary policy. Fiscal policy refers to the

taxation, expenditure and borrowing by thegovernment.

` It is a part of government policy, which is

concerned with raising revenue through taxation

and other means and deciding on the level andpattern of expenditure.


25/34


26/34

` To mobilize resources for economic growth,

especially for the public sector.

` To promote economic growth in the private sector

by providing incentives to save and invest.` To restrain inflationary forces in the economic in

order to ensure price stability.

` To ensure equitable distribution of income and

wealth so that fruits of economic growth are fairlydist


27/34





` Monetary Policy of IndiaMonetary Policy of India


28/34

` Govt. collects large funds from public by way

of taxes, these taxes are broadly classify as

direct taxes & indirect taxes .As a result of

taxes, real income of people is diminished & soalso their aggregate demand. Also change in

taxation has an inverse effect on national

income, fall in taxation increases national

income & rise in taxation decreases nationalincome.


29/34

` Aggregate demand is influenced by govt.

expenditure. On increase in public (govt.) expenditure

there is increase in aggregate demand and vice

versa. Public expenditure can be of two types (i)

expenditure incurred to buy goods & services. it has

direct effect on aggregate demand. (ii) public

expenditure can also be incurred without buying

goods & services e.g. expenditure Made on

pensions, medical facilities, education by govt., it hasindirect effect on aggregate demand


30/34

` Aggregate demand is also influenced by public

debt policy public debt is of two kinds (i) internal

debt (ii) external debt. effect of public debt on

aggregate demand depends on many factors. Ifdue to public debt demand of private sector

doesnt fall then by spending the amount collected

through public debt govt. can increase aggregate

demand.


31/34

` It refers to financing of the deficit of governments

budget. when govt. meets its budgetary deficit by

borrowing from the central bank, it is called deficit

financing. As a result of deficit financing, incomeof the people goes up and along with it aggregate

demand also goes up.


32/34

` Keynes emphasised the following fiscal measures

to check inflation:

(i) Decrease in public expenditure.

(ii) Increase in public debts.(iii) Delay in the payment of old debts.

(iv) Increase in taxes.

(v) Over-valuation of money.

(vi) Surplus budget policy.


33/34

` Following measures are suggested to check

deflation:

(i) Increase in government expenditure.

(ii) Decrease in taxes.(iii) Increase in social welfare expenditure.

(iv) Pump priming.

(v)

Price support policy.(vi) Deficit financing.


34/34

THANK YOUTHANK YOU

21558116 Monetary Policy1

Documents

Transcript of 21558116 Monetary Policy1