The document discusses monetary policy and fiscal policy in India. It defines monetary policy as the use of tools by the Reserve Bank of India to regulate money supply and achieve objectives like full employment and price stability. The key monetary policy tools are bank rate, open market operations, statutory liquidity ratio, cash reserve ratio, and repo rate. Fiscal policy relates to government income/expenditure and uses tools like public expenditure, taxation, public debt, and deficit financing to promote growth. Both policies aim to achieve similar economic objectives but coordination between the two is important.
2. Monetary Policy of India is formulated and executed by reserve
bank of India to achieve specific objectives.
Reserve Bank of India states that,
Monetary policy refers to the use of instruments under
the control of the central bank to regulate the availability,
cost and use of money and credit.
Monetary Policy
3. OBJECTIVES OF MONETARY POLICY
Full employment
To attain price Stability
To Promote economic growth
To attain exchange stability
To Promote saving and investment
To Control Trade cycle
To Regulate Money Supply In Economy
4. Tools Of Monetary Policy
Bank Rate
Open Market Operations
Statutory Liquidity Ratio ( SLR )
Cash Reserve Ratio ( CRR )
Repo Rate
5. Bank Rate is also known as discount rate.
It is the rate at which RBI lends to the commercial banks or
rediscounts their bills.
If bank rate is increased ,then commercial banks also charge
higher rate of interest on loans given by banks to public because
now commercial banks get funds from RBI at higher rate of
interest.
Bank Rate
6. It means that the bank controls the flow of credit through the sale
and purchase of securities in the open market.
When securities are purchased by central bank, then RBI makes
payment to commercial banks and public. So, the public and
commercial banks now have more money with them.
It increases money supply with commercial banks and public.
Open Market Operations
7. Statutory Liquidity Ratio
It means a certain percentage of deposits is to be kept by
banks in form of liquid assets.
This is kept by bank itself the liquid assets here include
government securities, treasury bills and other securities
notified by RBI.
8. 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.
9. 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 .
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.
Repo Rate
10. LIMITATIONS OF MONETARY POLICY
Poor Banking Habit
Underdeveloped Money Market
Existence Of Black Money
Conflicting Objectives
Lack Of Coordination With Fiscal Policy
Lack Of Banking Facilities
Limitations of Monetary Instruments
11. Fiscal policy is related to income and expenditure of the
government. It is an instrument for promoting economic
growth, employment, social welfare etc.
Fiscal policy means any decision to change the level,
composition or timing of government or to change the rate and
structure of tax.
The objectives of fiscal policy is same as of monetary policy.
Fiscal policy
12. Public Expenditure
Taxation Policy
Public Debt
Deficit Financing
INSTRUMENTS OF FISCAL POLICY
13. Public expenditure influences the economic activities of country
very much. Public expenditure may be of two kinds i.e.
developmental and non developmental.
Expenditure on developmental activities requires huge amount of
capital. So much capital cannot be made available by private sector
alone.
Public expenditure may be made in many ways
(1) Development of state enterprises
(2) Support to private sector
(3) Development of infrastructure
(4) Social Welfare.
Public expenditure
14. Taxation Policy
Taxes are the main source of revenue of government. Government
levies both direct and indirect taxes in India.
Direct taxes are those which are directly paid by the assesses to the
government i.e. income tax, wealth tax etc.
Indirect Taxes are applied on the manufacture or sale of goods and
services. These are initially paid to the government by an
intermediary. Examples of these are sales tax, service tax, excise
duty etc.
15. Government needs lot of funds for economic development of
the country. No government can mobilise so much funds by way of
tax alone.
It is therefore, becomes inevitable for the government to
mobilise resources for economic development by resorting the
public debt.
Public debt refers to a part of the total borrowings by the
Government which includes such items as market loans, special
bearer bonds, treasury bills etc. It also includes the outstanding
external debt.
Public Debt
16. Deficit Financing refers to financing the budgetary deficit.
Budgetary deficit here means excess of government expenditure
over government income.
It means “Taking loans from reserve bank of India by the
government to meet the budgetary deficit” .
Deficit Financing
17. Limitations Of Fiscal Policy
Lack Of accurate Forecasting
Delay in Decision
Poor Tax Administration
Inequality Of income
Failure in Public Sector
Increasing Interest Burden