MONETARY AND FISCALPOLICY

PRESENTED BY
RISHI SINGH

GURLEEN KAUR
KAMINI JAIN
SUMIT SONI
AMBESH KUMAR
KIRANDEEP JATTANA
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Quantitative Measures
 Qualitative Measures
 Controlling Inflation
 INTRODUCTION
•Monetary Policy is essentially a program of action
undertaken by the Monetary Authorities, generally the
Central Bank, to control and regulate the supply of
money with the public and the flow of credit with a view
to achieving pre-determined macro-economics goals.

•At the time of inflation monetary policy seeks to

contract aggregate spending by tightening the money
supply or raising the rate of return.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Quantitative Measures
 Qualitative Measures
 Controlling Inflation
 OBJECTIVES

 To achieve price stability by controlling inflation and

deflation.

 To promote and encourage economic growth in the

economy.

 To ensure the economic stability at full employment or

potential level of output.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Quantitative Measures
 Qualitative Measures
 Controlling Inflation
• The open market operations is sale and purchase of government securities
and Treasury Bills by the central bank of the country.

• When the central bank decides to pump money into circulation, it buys
back the government securities, bills and bonds.

• When it decides to reduce money in circulation it sells the government

bonds and securities.

• The central bank carries out its open market operations through the
commercial banks.
 Discount rate or bank rate is the rate at which central bank
rediscounts the bills of exchange presented by the commercial
bank.

 The central bank can change this rate increase or decrease

depending on whether it wants to expand or reduce the flow of
credit from the commercial bank.
• A rise in the discount rate reduces the net worth of the
government bonds against which commercial banks borrow funds
from the central bank. This reduces commercial banks capacity to
borrow from the central bank.

• When the central bank raises its discount rate, commercial banks
raise their discount rate too. Rise in the discount rate raises the
cost of bank credit which discourages business firms to get their
bill of exchange discounted.
• The cash reserve ratio is the percentage of total deposits which
commercial banks are required to maintain in the form of cash
reserve with the central bank.

• The objective of cash reserve is to prevent shortage of cash for

meeting the cash demand by the depositors.

• By changing the CRR, the central bank can change the money
supply overnight.

• When economic conditions demand a contractionary monetary

policy, the central bank raises the CRR. And when economic
conditions demand monetary expansion ,the central bank cuts
down the CRR.
• In India ,the RBI has imposed another reserve requirement in
addition to CRR. It is called statutory liquidity requirement.

• The SLR is the proportion of the total deposits which commercial

banks are statutorily required to maintain in the form of liquid
assets in addition to cash reserve ratio.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Quantitative Measures
 Qualitative Measures
 Controlling Inflation
• The banks provide loans only up to a certain percentage of the
value of the mortgaged property.

• The gap between the value of the mortgaged property and

amount advanced is called Lending Margin.

• The central bank is empowered to increase the lending margin

with a view to decrease the bank credit.
 The moral suasion is a method of persuading and convincing the
commercial banks to advance credit in accordance with the
directives of the central bank in overall economic interest of the
country.

 Under this method the central bank writes letter to hold meetings
with the banks on money and credit matters.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Quantitative Measures
 Qualitative Measures
 Controlling Inflation
 An Expansionary Policy increases the total supply of money in the
economy while a Contractionary Policy decreases the total money
Supply into the market.

 Expansionary policy is traditionally used to combat a recession by

lowering interests rates.

 Lowered interest rates means lower cost of credit which induces

people to borrow and spend thereby providing steam to various
industries and kick start a slowing economy.
 A Contractionary Policy results in increasing interest rates to
combat inflation.
 An Economy growing in an uninhibited manner leads to inflation
 Hence increasing interest rates increase the cost of credit thereby
making people borrow less.
 Due to lesser borrowing the amount of money in the system
reduces which in turn brings down inflation.
 A Contractionary Policy is also known as TIGHT POLICY as it
tightens the flow of money in order to contain Inflationary forces.
 The RBI makes an adjustment in its lending rate(Repo Rates) in
order to influence the cost of credit. Thereby discouraging
borrowing and hence reduces brings reduction in the system.
 Whenever the liquid in the system increases, the RBI intervenes to
stabilize the system.
 The Central Bank does this by issuing fresh bonds and treasury
bills in open market. This tool was extensively used at the time
when dollar inflows into our economy were very high, resulting in
rupee appreciating. In order to stabilize the exchange rates, RBI
first bought additional dollars thereby stabilizing the rate of
exchange.
 CRR-
 By increasing the CRR, the RBI decreases the lending capacity of
the 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 were
deprived of lending to the extent of 75 basis points of their deposit
value.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Controlling Inflation
 Monetary Policy of India
 The 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 the government.
 It is a part of government policy, which is

concerned with raising revenue through

taxation and other means and deciding on
the level and pattern of expenditure.
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Controlling Inflation
 Monetary Policy of India
 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 fairly dist
 Contents
 Introduction
 Objectives
 Instruments of Monetary Policy
 Controlling Inflation
 Monetary Policy of India
 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 & so also their aggregate
demand. Also change in taxation has an
inverse effect on national income, fall in
taxation increases national income & rise
in taxation decreases national income.
 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 has
indirect effect on aggregate demand
 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. If due to public debt
demand of private sector doesn’t fall then by
spending the amount collected through
public debt govt. can increase aggregate
demand.
 It refers to financing of the deficit of
government’s budget. when govt. meets its
budgetary deficit by borrowing from the
central bank, it is called deficit financing. As
a result of deficit financing, income of the
people goes up and along with it aggregate
demand also goes up.
 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.
 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.
THANK YOU