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2. Monetary Policy of India is formulated and executed by
reserve bank of India to achieve specific objectives.
The monetary policy is defined as discretionary act undertaken
by the authorities designed to influence (A) the supply of
money (B) cost of money or rate of interest (C) the availability
of money for achieving specific objectives
The main elements of monitory policy are
(1) It regulates stock and growth rate of money supply
(2) It regulates the entire banking system of the economy
(3) It regulates the level an structure of interest rates directly
in organised sector and indirectly in unorganised sector
(4) It determines the allocation of loans among different
sectors

3. CD Deshmukh
The First Indian Governor of
Reserve Bank of India (RBI)
Dr. D. Subbarao
Present Governor of RBI

4. 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 Promote Employment
To Regulate Money Supply In Economy

5. INSTRUMENTS OF
MONETARY POLICY
Bank Rate
Statutory Liquidity Ratio
Open Market Operations
Cash Reserve Ratio
Repurchase Auction Rate(Repo) and Reverse Repurchase Auction Rate (Reverse Repo)
Margin Requirement
Credit Ceiling
Direct Action
Moral Persuasion

6. 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. Higher rate of
interest will contract credit in the economy
i.e. public will take lesser loans because of
higher rate of interest. The current bank
rate is 10.25%

7. Past Record of
Bank Rate
DATE Bank Rate DATE Bank
Rate
DATE Bank
Rate
15 - July 2013 10.25 2-Mar-1999 8.00 9-Jan-1971 6.00
03 - May 2013 8.25 29-Apr-1998 9.00 2-Mar-1968 5.00
19 - March 2013 8.50 3-Apr-1998 10.00 17-Feb-
1965
6.00
29- January -
2013
8.75 19-Mar-1998 10.50 26-Sep-1964 5.00
17-April-2012 9.00 17-Jan-1998 11.00 3-Jan-1963 4.50
13-Feb-2012 9.50 22-Oct-1997 9.00 16-May-
1957
4.00
29-Apr-2003 6.00 26-Jun-1997 10.00 15-Nov-
1951
3.50
30-Oct-2002 6.25 16-Apr-1997 11.00 28-Nov-
1935
3.00
23-Oct-2001 6.50 9-Oct-1991 12.00 5-Jul-1935 3.50
2-Mar-2001 7.00 4-Jul-1991 11.00 2-Jan-1900 1.00

8. 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. If
SLR is more then banks have to keep more
part of deposits in specified securities and
banks will have less surplus funds for
granting loans. It will contract credit.SLR is
fixed by RBI and usually it has been ranging
between 24% to 39%.The current SLR is 23%.

10. 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. This will
expand credit in the economy. In year 2012-
13 RBI Purchases securities 8,000 crore

11. 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 Narshimam committee Report
the CRR was reduced from 15% in the 1990 to 5
percent in 2002. As of January 2013, the CRR is 4.00
percent

13. 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 August 2013, the repo
rate is 7.25 % and reverse repo rate is 6.25

15. Margin is the difference between loan value
and market value of security. It is fixed by
RBI. For different types of loans, margin
requirement is different .If margin % is more,
then less loan will be given for a certain
value of security and vice versa. E.g. if
margin requirement is 20% then bank will
give maximum 80% of the market value of
security as loan. For priority sector, margin
requirement is less and in areas where credit
is to be contracted margin requirement is
increased.

16. Reserve bank can also exercise moral influence
upon the members banks with a view to
pursue its monetary policy. RBI convinces
banks to curb loan to unproductive sectors.
From time to time reserve bank holds
meetings with the member banks seeking
their cooperation in effectively controlling
the monetary system of the country. It
advices them to extend more credit to
priority sector.

17. According to 1949 act, Reserve bank can stop
any commercial bank from any type of
transaction. In case of defiance of the orders
of reserve bank, it can resort to direct action
against the member bank. It can stop giving
loans and even recommend the closure of
the member bank to the central government
under pressing circumstances.

18. 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.

19. LIMITATIONS OF
MONETARY POLICY
MEASURES
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

20. Monetary policy 2013-
14
RBI's first-quarter monetary policy
Repo rate unchanged at 7.25%.
The Reverse Repo Rate stood at 6.25%
Marginal Standing Facility (MSF) and Bank Rate
stood at 10.25%
Cash reserve ratio too unchanged at 4 percent
Cuts GDP forecast for FY'14 to 5.5 percent from
5.7 percent earlier
Next mid-quarter review of policy on September
18; second quarter policy review on October 29.
This is RBI Governor D Subbarao's last policy
before expiry of his five year term.

21. 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.

22. INSTRUMENTS OF
FISCAL POLICY
Public
Expenditure
Taxation
Policy
Public Debt
Deficit
Financing

23. 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. It requires substantial increase
in public expenditure. Public expenditure
may be made in many ways (1) Development
of state enterprises (2) support to private
sector (3) Develpoment of infrastructure (4)
Social Welfare.

24. 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 tax are paid indirectly by the public to
the government i.e. excise duty, custom duty, VAT etc.
Direct tax are progressive in nature. Indirect tax are not
progressive. These change from all the segments of
society at same rate. The main objectives of taxation
policy are:
(1) Mobilisation of resources
(2) To promote saving
(3) To promote saving
(4) To bring Equality of income and wealth

25. 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 is obtained
from two kinds
(1) Internal Debt
(2) External Debt
Public Debt Of current year (In crores of Rupees)
As on 31st March 2013 As on 31st March 2014
Internal debt 48,66,829.00 54,68,622.11
External debt 1,72,302.01 1,82,862.11
Total 50,39,131.01 56,51,484.22

26. 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” .
Reserve bank gives loans buy issuing new currency
notes. Increase in money supply leads to fall in
value of money. Fall in value of money in turn leads
to increase in price level. So deficit financing
should be kept low as it leads to price rise in
economy. Thus due to deficit financing necessary
funds are made available for economic Growth and
on the other inflation of country increases.

27. Limitations Of Fiscal
Policy
Lack Of accurate Forecasting
Delay in Decision
Poor Tax Administration
Inequality Of income
Failure in Public Sector
Increasing Interest Burden

28. Fiscal policy 2013-14
Total Expenditure 16,65,297
Revenue Expenditure 14,36,168
Capital Expenditure 2,29,129
Plan Expenditure at ` 5,55,322 crore.
Fiscal deficit for the current year contained at 5.2 per cent and for
the year 2013-14 at 4.8 per cent.
Revenue deficit for the current year at 3.9 per cent and for the
year 2013-14 at 3.3 per cent.
By 2016-17 fiscal deficit to be brought down to 3 per cent, revenue
deficit to 1.5 per cent and effective revenue deficit to zero %
No change in the normal rates of 12 percent for excise duty and
service tax.
No case to revise either the slabs or the rates of Personal Income
Tax. Even a moderate increase in the threshold exemption will put
hundreds of thousands of Tax Payers outside Tax Net