Presentation on:

MONETARY AND FISCAL POLICY

Presented by:
Bhushan Agrawal (B-2)
Madhavi Gujarati (B-14)
Nikhil Kadge (B-19)
Praful Lone (B-28)
Neha Muchhala (B-34)
Vinit Tulaskar (B-57)
 Monitory Policy

•Expansionary policy

•Contractionary policy
 History of Monitory policy
• Creation of Bank of England in 1694(printing
of currency note backed with gold reserves)

• Maintain the nations peg to the gold

standards and to trade in narrow band with
other gold backed currencies.
 Trends in central banking
• CB influence interest rate by expanding or
contracting the monitory base
• Open market operation or sale and purchase
of second hand government debt or changing
the reserve requirement.
• Lower interest rate---- purchase govt debt-----
inc in amt of cash in circulation---- higher
inflation---- lower the interest rate….
 Developing countries

• Poor record in managing monitory policy

---Not independent of government (Political

desires of govt.)
 Types of Monetary Policies
• Inflation Targeting
• Price Level Targeting
• Monetary Aggregates
• Fixed Exchange Rate
• Gold Standard
• Mixed Policy
 Fixed Exchange Rate
• Fiat Fixed Rate

• Fixed Convertibility

• Fixed Exchange Rate

 Gold Standard
• National currency is measured in units of
Gold.
• Special Case of Fixed Exchange Rate policy
• Advantages – Simplicity and Transparency
• Disadvantages – induces Deflation (economies
grow faster than money supply)
 Money Aggregates
• M0: includes bank reserves – (monetary base or narrow
money).
• MB: is referred to as the total currency – most liquid
measure of money supply.
• M1: Currency with the public + Deposit money of the public.
• M2: broader classification of money than M1. It is a key
economic indicator used to forecast inflation.
• M3: M2 +large deposits and other large, long-term deposits.
• MZM: Money with zero maturity. It measures the supply of
financial assets redeemable at par on demand.
 Monetary Aggregates in India
• Reserve Money (M0): Currency in circulation + Bankers’ deposits
with the RBI + ‘Other’ deposits with the RBI
• M1: Currency with the public + Deposit money of the public

• M2: M1 + Savings deposits with Post office savings banks.

• M3: M1+ Time deposits with the banking system = Net bank credit
to the Government + Bank credit to the commercial sector + Net
foreign exchange assets of the banking sector + Government’s
currency liabilities to the public – Net non-monetary liabilities of the
banking sector.
• M4: M3 + All deposits with post office savings banks.
Growth of M3 and M0 (Y-o-Y)
 Policy of Various Nations
• United Kingdom, Australia, Brazil, Canada,
South Africa - Inflation targeting
• China - Monetary targeting and targets a
currency basket
• India, United States – Mixed Policy (Multi-
indicator Approach)
• Singapore - Exchange rate targeting
 Monetary Policy Tools
• Monetary base
• Reserve requirements
• Discount window lending
• Interest rates
• Currency board
 FISCAL POLICY
• Use of govt. revenue collection for funding its
expenditure.
• Variables effected by fiscal policy.
– Aggregate demand and the level of economic
activity;
– The pattern of resource allocation;
– The distribution of income.
 STANCES OF FISCAL POLICY
• Neutral
• Expansionary and
• Contractionary.
 METHODS OF FUNDING
• Taxation
• Seignior age, the benefit from printing money
• Borrowing money from the population or from
abroad
• Consumption of fiscal reserves.
• Sale of fixed assets (e.g., land).
• Consuming prior surpluses
 ECONOMIC EFFECTS OF FISCAL POLICY

• Objectives
– Price stability
– Full employment
– Economic growth.
• Stimulate aggregate demand.
• Reduce aggregate demand.
• Funding budget deficit.
 FISCAL STRAIGHTJACKET
Straitjacket?
Anything that severely confines, constricts, or hinders.

The concept :
General economic principle that suggests strict
constraints on government spending and public sector
borrowing

Why?
to limit or regulate the budget deficit over a time period.

Example :
Various states in the United States have various forms of
self-imposed fiscal straitjackets.
 Criticisms of Fiscal Policy
• Disincentives of Tax Cuts:
Increasing Taxes to reduce demand may cause disincentives to work, if this occurs there
will be a fall in productivity

• Side Effects on Public Spending

• Poor Information: E.g.  If the govt believes there is going to be a recession, they will
increase demand, however if this forecast was wrong and the economy grew too fast, the
govt action would cause inflation.

• Time Lags: If the govt plans to increase spending this can take along time to filter into the
economy and it may be too late.

• Budget Deficit

• Other Components of Demand: if consumer confidence is very low, reducing taxes may
not lead to an increase in consumer spending.
 Which is More Effective Monetary Policy or Fiscal Policy?

• No independent policy can help to run the

whole economy

• Both of them go hand in hand

• Monetary policy has become more popular

recently
 Various Scenarios
1.During Inflation

 Liquidity in the market

 Value of money

Control measures?
1.Increase interest rates- use of monetary policy
2.Increase tax rates-use of fiscal policy
2.During Recession

 Liquidity in the market

 Demand in the market

Control measures?
1.Decreasing the interest rate-monetary policy
2.Decreasing the tax slabs and increasing the
government spending –fiscal policy
 Tools Of Indian Monetary Policy
• Bank Rate
• Cash Reserve Ratio
• Statutory Liquidity Ratio
• Repo Rate
• Reverse Repo Rate
 Evolution Of Monetary Policy In India
 After the crisis in 1991, stabilization went
simultaneously with structural reforms
 Change in context fundamentally altered the
manner in which monetary policy began to be
formulated
 Macroeconomics and price stability received
greater emphasis
 Continuous rebalancing of priority between
growth and price stability
• Growing market orientation of monetary policy
• From direct to move indirect and market based
money policy measured
• Initially CRR and SLR requirements locked away
near 70% of bank deposits
• The SLR was brought down from 38.5% in 1992
to 25% in mid 1994
• CRR reduced to 5% from 15 % after 1991
 Monetary Policy In India 2009-2010
28th July 2009

Main Concern was to have the GDP 5.7%

balance between Liquidity and Repo Rate 4.5 -> 4.75%

Inflation
Reverse Repo 3 -> 3.25%
RR and RRR was hiked by 25bp Rate

each CRR 5%

Forecast growth was raised from Inflation (1.55%)

6.1% to 6.5%
SLR 24%

Raising food prices

 Monetary Policy In India 2009-2010
26th Oct 2009

Main Concern rising inflation GDP 6.7%

Repo Rate 4.75%

Growing signs of recovery in
industrial sector Reverse Repo 3.25%
Rate
SLR was hiked by 100bp CRR 5%

Raising food prices, 2 digit % Inflation 1.55%

growth in prices of food
SLR 24% -> 25%
 Monetary Policy In India 2009-2010
29th January 2010

Main Concern inflation with GDP 7.5%

growth Repo Rate 4.75%

Focus on managing recovery from
managing crisis Reverse Repo 3.25%
 Growth projected : 6.7 to 7.9% Rate
 CRR was hiked by 75bp in 2 CRR 5 -> 5.75%
stages -> 36000cr
 Recovery to be supported Inflation 7.41%
without compromising price
SLR 24% -> 25%
stability
 Monetary Policy In India 2009-2010
19th March 2010

Main Concern growth sacrifice GDP 7.4%

 Growth projected : 6.7 to 7.9%
Repo Rate 4.75 -> 5%
 RR & RRR was hiked by 25bp
each Reverse Repo 3.25 -> 3.5%
 ‘Hikes in policy rates are anti Rate

growth’ CRR 5.75%

 Inflation: 5.6 to 9.9 (Nov to Feb)
Inflation 9.9%

SLR 25%
 Monetary Policy In India 2009-2010

• IIP results were declared 16.7%

• ‘Except consumer non durables all sectors are
doing well’
• The growth of capital goods at 56% is
encouraging
 Monetary Policy In India 2009-2010
20th April 2010

Main Concern To suck excess

GDP 8%
liquidity
Repo Rate 5 -> 5.25%
Growth projected : 8.5 from 7.5%
Reverse Repo 3.5 -> 3.75%
Rate
 RR & RRR was hiked by 25bp
each and CRR by 50bp CRR 5.75 -> 6%

Inflation
 25000cr and corporate credit
SLR 25%
Supply side factors
 Monetary Policy In India 2009-2010
2nd July 2010

GDP 8.5%

 Exit from expansionary monetary Repo Rate 5.25 -> 5.5%

policy Reverse Repo 3.75 -> 4%

Rate
 RR & RRR was hiked by 25bp
CRR 6%

Inflation 10.55%

SLR 25%
 Monetary Policy In India 2009-2010
27th July 2010

GDP 8.5%

 Rates were hiked as inflation was Repo Rate 5.25 -> 5.5%

in two digits for 5th month in Reverse Repo 3.75 -> 4%

succession Rate

CRR 6%
 inflation was partly contributed
by government’s move raising fuel Inflation 10.55%
prices
SLR 25%
 RR & RRR was hiked by 25bp
 Mid-Quarter Monetary Policy Review: September 2010

GDP 8.75%

Repo Rate 5.75-> 6%

Expected Outcome Reverse Repo 4.5 -> 5%

Control inflation without affecting the growth Rate

continue the process of normalisation of the

monetary policy instruments. CRR 6%

Inflation 10.05%
THANK YOU