1. UNIT -4
Monetary and Fiscal Policies

2. • Monetary policy, is the policy statement through which the Reserve Bank
of India seeks to regulate the money supply in the economy
• It is announced twice a year– (April-September) & (October-March)
Objectives of Monetary Policy
• Maintain price stability
• Adequate flow of credit to all sectors of the economy.
• Exchange Stability
• Norms for the banking and financial sector and the institutions which are
governed by it.
• Ensure overall economic growth
RBI : Monetary Policy

3. Qualitative
Rationing of credit
Direct action
Moral suasion
Changes in margin
requirements
Quantitative
OMO s
Bank rate
SLR
CRR

4. Quantitative Elements
Bank Rate-The minimum rate at which RBI extends credit to member Banks .
( 9% as on 17/4/2012)
Open Market Operation : It refers to sale and purchase of Govt securities by
the RBI
Repo Rate: Repo rate is the rate at which banks borrow funds from the RBI to
meet the gap between the demand they are facing for money (loans) (8% as
on 17/4/2012)
Reserve Repo Rate: The rate at which RBI borrows money from the banks (or
banks lend money to the RBI) is termed the reverse repo rate. (7% as on
17/4/2012)
CRR-The percentage of bank’s deposits which they must keep as cash with RBI
(4.5% as on 17/9/2012)
SLR-All Bank have to keep a portion of total deposits with itself in liquid assets
(23% as on 11/8/2012)

5. Key Indicator as on 29th Jan. 2013
• Current rate Inflation 4.25%
• Bank rate 8.75%
• CRR 4.00%
• SLR 23%
• Repo rate 7.75%
• Reverse repo rate 6.75%
Source : Reserve Bank of India, IndiaBulls.com

6. IF THEN
Bank Rate Lending capacity of commercial banks reduces
Thus Loans become EXPENSIVE
Contraction of credit
CRR/ SLR
Reduces reserves for lending
Contracting Credit
Bank Rate
Banks get loans at cheaper rates
Thus even they lend at low interests
Expansion of Credit
CRR/ SLR
More funds with banks
So more Credit to the Public

7. EXPANSIONARY & TIGHT
MONETARY POLICY
 EXPANSIONARY MONETARY POLICY Problem: Recession and
unemployment Measures:
• (1) Central bank buys securities through open market operation
• (2) It reduces cash reserves ratio
• (3) It lowers the bank rate Money supply increases Investment
increases Aggregate demand increases Aggregate output increases
by a multiple of the increase in investment
 TIGHT MONETARY POLICY Problem: Inflation Measures:
• (1) Central bank sells securities through open market operation
• (2) It raises cash reserve ratio and statutory liquidity
• (3) It raises bank rate (4) It raises maximum margin against holding
of stocks of goods Money supply decreases Interest rate
raises Investment expenditure declines Aggregate demand
declines Price level falls

8. Fiscal Policy
 The 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.
 Objectives :
• Attain full Employment
• Increase rate of Investment
• Stabilize the general price level
• Promote economic growth with equity
• Mobilize resources and redistribute income

9. Instruments of Fiscal Policy
Fiscal Policy uses three main instruments :
• Taxation
• Public Expenditure
• Public Debt Management

10.  Taxation : Direct tax and Indirect taxes
• Direct Taxes are levied directly on an individual’s income or
wealth . Example of direct taxation include Income tax ,
corporate tax, wealth tax, capital gains tax etc. Direct taxes are
mainly collected by the central government.
• Indirect Taxes : Indirect taxes are levied on consumers
expenditure or outlay. For e.g Customs duties, motor vehicle
tax, excise duty etc. Indirect taxes are collected by both central
and state.

11. Public Expenditure
• Expenditure by the govt. may take various
forms. It may be normal govt. expenditure on
defense, police and public administration .
• Planned development including expenditure
on roads, parks, expenditure on relief works,
subsidies of various kind etc.

12. Public Debt Management
• central and state governments all borrow money to pay for
large projects, such as new government buildings, schools or
for funding etc.
• This forms what is collectively known as the public debt, so-
called because it is money that public organizations owe for
which the burden of paying rests ultimately with taxpayers.
• Public debt may be raised internally or externally.
 EXTERNAL DEBT
• Bilateral borrowings
• Multi lateral borrowings
• Loans from international organizations like IMF, World Bank
etc.

13.  INTERNAL DEBT
• Market loan
• Treasury bills
• Bonds
• Special securities issue by RBI Ways and Mean Advances ( To meet the
short term expenditure)
• Special floating and other loans (These represents India's contribution
towards share capital of international financial institutions like IMF, World
Bank, International Development Agency and so on. )
 OTHER INTERNAL LIABILITIES
• Small savings (Recently the Government of India launched a number of
small savings instruments. These include Relief Bonds 1987, Kisan Vikas
Patras, Indira Vikas Patras, etc. )Provident Funds Reserve funds and
depositsOther accounts (Postal Insurance and Life Annuity Fund etc.)