Monetary policy of India

Monetary policy is the process by which monetary authority of a country, generally a central bank controls the

supply of money in the economy by its control over interest rates in order to maintain price stability and achieve

high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed

as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by

RBI, are:

Price Stability

Price Stability implies promoting economic development with considerable emphasis on price stability.

The center of focus is to facilitate the environment which is favourable to the architecture that enables

the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit and money supply with

special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non-essential fixed investment.

Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of

the unit. To avoid this problem the central monetary authority carries out this essential function of

restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in

the organization

Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an

independent objective of monetary policy.

Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of credit to priority sector and

small borrowers. This policy decides over the specified percentage of credit that is to be allocated to

priority sector and small borrowers.

Equitable Distribution of Credit

The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and

economic class of people

To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It tries to increase the

efficiency in the financial system and tries to incorporate structural changes such as deregulating interest

rates, ease operational constraints in the credit delivery system, to introduce new money market

instruments etc.

Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It

encourages more competitive environment and diversification. It maintains its control over financial

system whenever and wherever necessary to maintain the discipline and prudence in operations of the

financial system.

Monetary operations

Monetary operations involve monetary techniques which operate on monetary magnitudes such as money

supply, interest rates and availability of credit aimed to maintain Price Stability, Stable exchange rate,

Healthy Balance of Payment, Financial stability, Economic growth. RBI, the apex institute of India which

monitors and regulates the monetary policy of the country stabilizes the price by controlling Inflation. RBI

takes into account the following monetary policies:

Major Operations

Open Market Operations

An open market operation is an instrument of monetary policy which involves buying or selling of

government securities from or to the public and banks. This mechanism influences the reserve position of

the banks, yield on government securities and cost of bank credit. The RBI sells government securities to

contract the flow of credit and buys government securities to increase credit flow. Open market operation

makes bank rate policy effective and maintains stability in government securities market.

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in

the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system

and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the

suggestion by the Narsimham committee Report the CRR was reduced from 15% in the 1990 to 5 percent

in 2002. As of October 2013, the CRR is 4.00 percent

Statutory Liquidity Ratio

Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point

of time of their total time and demand liabilities. These assets can be cash, precious metals, approved

securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as

the Statutory liquidity ratio.There was a reduction of SLR from 38.5% to 25% because of the suggestion

by Narshimam Committee. The current SLR is 22.0%(w.e.f.05/08/14)

Bank Rate Policy

The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing

funds or loans to the banking system. This banking system involves commercial and co-operative banks,

Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial institutes. Funds are

provided either through lending directly or rediscounting or buying money market instruments like

commercial bills and treasury bills. Increase in Bank Rate increases the cost of borrowing by commercial

banks which results into the reduction in credit volume to the banks and hence declines the supply of

money. Increase in the bank rate is the symbol of tightening of RBI monetary policy. As of 1 January 2013,

the bank rate was 8.75% and as on 21 June 2014 bank rate is 9%.

Credit Ceiling

In this operation RBI issues prior information or direction that loans to the commercial banks will be

given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public.

They will allocate loans to limited sectors. Few example of ceiling are agriculture sector advances,

priority sector lending.

Credit Authorization Scheme

Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya was the

chairman of RBI. Under this instrument of credit regulation RBI as per the guideline authorizes the banks

to advance loans to desired sectors.[7]

Moral Suasion

Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and

measures in so and so trend of the economy. RBI may request commercial banks not to give loans for

unproductive purpose which does not add to economic growth but increases inflation.

Repo Rate and Reverse Repo Rate

Repo rate is the rate at which RBI lends to commercial banks generally against government securities.

Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo

rate discourages the commercial banks to get money as the rate increases and becomes expensive.

Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in

the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the

public to borrow money and will encourage them to deposit. As the rates are high the availability of

credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse

Repo Rate is a symbol of tightening of the policy. As of October 2013, the repo rate was 7.75 % and

reverse repo rate was 6.75%. On January 28, 2014, RBI raised repo rate by 25 basis points to 8.00 % and

reverse repo rate by 25 basis points to 7.00%.

Key IndicatorsAs of 5 August 2014, the key indicators are.

Indicator Current rate

Inflation 8.0%

Bank rate 9%

CRR 4.00%

SLR 22.00%

Repo rate 8.00%

Reverse repo rate 7.00%

Marginal Standing facility rate 9.00%

Meaning of Fiscal PolicyThe fiscal policy is concerned with the raising of government revenue and incurring of government

expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue.

Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. So, in broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings.

The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development.

Main Objectives of Fiscal Policy in IndiaThe fiscal policy is designed to achieve certain objectives as follows :-1. Development by effective Mobilization of ResourcesThe principal objective of fiscal policy is to ensure rapid economic growth and development. This

objective of economic growth and development can be achieved by Mobilisation of Financial Resources.

The central and the state governments in India have used fiscal policy to mobilise resources.The financial resources can be mobilised by :-

Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of

direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.

Public Savings: The resources can be mobilised through public savings by reducing government

expenditure and increasing surpluses of public sector enterprises.

Private Savings: Through effective fiscal measures such as tax benefits, the government can

raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial ResourcesThe central and state governments have tried to make efficient allocation of financial resources.

These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defense, interest payments, subsidies, etc.

But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

3. Reduction in inequalities of Income and WealthFiscal policy aims at achieving equity or social justice by reducing income inequalities among

different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

4. Price Stability and Control of InflationOne of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the

government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment GenerationThe government is making every possible effort to increase employment in the country through

effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self-employment scheme is taken to provide employment to technically qualified persons in the urban areas.

6. Balanced Regional DevelopmentAnother main objective of the fiscal policy is to bring about a balanced regional development. There

are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of PaymentFiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of

income tax on export earnings, Exemption of central excise duties and customs, Exemption of

sales tax and octroi, etc.The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries,

Imposing customs duties on imports, etc.The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve

balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export.

8. Capital FormationThe objective of fiscal policy in India is also to increase the rate of capital formation so as to

accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.\

9. Increasing National IncomeThe fiscal policy aims to increase the national income of a country. This is because fiscal policy

facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of InfrastructureGovernment has placed emphasis on the infrastructure development for the purpose of achieving

economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange EarningsFiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of

income tax on export earnings, exemption of sales tax, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

ECONOMIC TRENDSIntroduction: The year 2014 will be a watershed for India in political and economic terms. The nation will conduct its 16th general elections to form the new central government. It will also implement several radical economic policies, such as deregulation of diesel prices and expansion of direct cash transfer of subsidies. In last year’s edition of this report, India in 2013, Accenture highlighted the need for economic growth and inflation management. However, both areas are still pain points for India. In September 2013, consumer inflation reached 9.8 percent, while the economy grew by just 4.8 percent over the previous year. Early in 2014, amid these unfavorable trends, the nation faces a higher fiscal deficit, sluggish industrial growth and a larger current account deficit. Why is the Indian economy faltering on so many fronts simultaneously? The principle reason is that in the last few years, India has taken growth for granted and thus has invested less effort into raising the quality of growth. The fiscal deficit challenge serves as an excellent case in point. No doubt fiscal support (in such forms as excise duty cuts and tax concessions) provided much-needed stimulus to the Indian economy after the global economic crisis. Consequently, as economies around the world struggled to recharge growth during 2008-2011, India posted comparatively better growth numbers. Unfortunately, the nation did not simultaneously institutionalize mechanisms to enhance expenditure efficiency and manage subsidies. As a result, the national fiscal deficit ballooned during 2011-2012 and 2012-2013.The rate by which India has responded to impending crises constitutes another problem. Take inflation management. For more than a year now, inflation continues to remain untamed. Meanwhile, leakages in the food and petroleum sectors—the two key drivers of inflation—persist. And critical road and rail infrastructure projects are progressing only slowly, preventing Indian businesses from exploiting the

shortest possible routes to efficiently transport food, raw materials and petroleum products. In addition, despite being home to one of the world’s largest pools of digital talent, India invests only 0.6 percent of its planned budget on using digital technologies to enhance the speed and quality of public transactions and services delivery. As a result of poor growth, inflation and fiscal management, the nation finds itself burdened with high interest rates, high operating costs and low consumer and business confidence. The only silver lining to this cloud remains the consumption growth registered by India’s rural economy. Backed by real income growth from higher inflation indexed wages under governmental employment schemes, consumption in rural India now accounts for significantly higher proportions of the industrial goods and services sold by the nation’s businesses. Clearly, the Indian economy is edging toward one of its weakest growth moments in a decade. The nation’s economic growth engine runs the real risk of losing momentum. Avoiding this scenario will require swift, effective action. But the widely held view amongst experts is that recovery will have to wait for the new government to assume power after the elections in May 2014.Hence the wheel of revival may not start turning until the second half of 2014. Once it does begin turning, it will have to move quickly and in the right direction to inject the necessary levels of efficiency and quality into India’s public and private spending as well as into the country’s inflation management efforts. Digital technologies can help the government as well as industry to achieve these goals. For instance, speedier implementation of government programs aimed at creating scalable digital platforms (such as the national broadband network) will help generate greater returns on investments in social programs through robust participation by citizens. At the same time, it will create a network of cheaper digital highways for industry to reach remote regions and consumers and unearth fresh sources of growth. Like the government, industry will need to “think outside the box” and take fresh approaches to surmounting its most pressing challenges. The manufacturing and services sectors alike can benefit by using digital technology to more productively engage with partners in their business ecosystems to create wealth in an inflationary environment. In this report, we discuss the trends shaping India’s macroeconomic and business environments. As always, we offer these ideas as starting points for lively dialogue about new business directions.This could be the year that

India’s new central government is formed after the elections for the 16th Lok Sabha Subsidies are rolled out to support manufacturing of electric vehicles in India and to build a

domestic industry of low-carbon transport Diesel prices are fully deregulated India overtakes the United States to become the second-largest Internet base in the world after

China The Indian space program takes a major leap forward with the Mars orbiter

SpotlightMade in India” digital technologies: An opportunity whose time has comeIndia’s digital economy is expected to grow exponentially in the next few years. The nation could have as many as 243 million Internet users by June 2014. If that happens, these users will outnumber American Internet users to make India the world’s second-largest online community after China. 18 Moreover, The Economist Intelligence Unit expects India’s Internet economy to reach a value of US$100 billion by 2015.

Disruptive innovations in the digital hardware and digital electronics industries are reducing the cost of ownership of smarter platforms, spurring sales of smartphones, tablets and iPods in India. Indeed, India now constitutes the world’s third-largest smartphone market. 20 In April-June 2013 alone, 70 international and domestic vendors shipped 1.15 million tablets in India.

Indian consumers’ unprecedented hunger for “smarter gadgetry” has met with an equally robust response from the nation’s entrepreneurs. In the last decade, more than four domestic brands have established a large footprint for themselves in the domestic smartphone handset and tablet market. At present, domestic brands have claimed 40 percent of the smartphone market 22 and around 11 percent of the tablet market.

Digital democratization is no longer limited to the demand side of the digital market. The supply side is also witnessing such democratization. Startups involved in e-commerce, B2B web-based tools and mobile applications that enhance end customers’ overall digital experience have mushroomed across India. According to the Microsoft India Accelerator Report (2012), among technology product startups, e-commerce startups constituted one third of all new companies, followed by B2B web-based tool companies. Angel investors and venture capitalists are showing more interest in financing ventures that have a digital technology background. As a result, the cost of establishing a startup in the digital technologies space has decreased. Digital technology incubators in the country are multiplying. India now boasts four specialized incubators for launching digital startups, and the number is expected to double in the next decade.

The central government’s IT spending in India is expected to reach US$6.4 billion in 2013, According to Gartner. 23 By investing in Aadhar and initiating the National Broadband Plan, the Indian government has paved the way for creating a robust digital foundation for existing businesses and budding entrepreneurs.

On the industry front, intensifying consumer demand for digital platforms and applications, coupled with a steadily maturing digital technology ecosystem, has incentivized large companies to explore greater use of digital technologies in their marketing and sales functions. Enterprises aware of the benefits of digital technologies across the value chain have started deploying them on the shop floor as well as across their design and procurement functions. Companies such as Hindustan Unilever Limited have invested in the development of digital media labs, and digital sales fronts are becoming commonplace in large consumer products companies. Tata Motors and Maruti have already adopted digital technologies to design complex systems on their shop floor.

India is readying itself to take advantage of a historical opportunity similar to the one it successfully unlocked two decades ago. In the nineties, the nation drew on its young English-speaking talent and entrepreneurial mindset to introduce “Made in India” scalable business models and cost-competitive processes in software technologies. This helped spark a services revolution that enabled India to record robust GDP growth rates. It also gave birth to a new, young middle class in India and introduced a new breed of Indian managerial and entrepreneurial talent to the world. Businesses, policymakers, academic institutions and other stakeholders now need to invest energy and resources to launch “Made in India” affordable and scalable digital technologies. They have the talent to embark on this journey, the entrepreneurship to innovate and a digital-savvy market to test and buy new offerings.