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objectives. The monetary policy is defined as discretionary act undertaken by the authorities
designed to influence
Monetary policy in India underwent significant changes in the 1990s as the Indian Economy
became increasing open and financial sector reforms were put in place. In the1980s,monetary
policy was geared towards controlling the quantum, cost and directions Of credit flow in the
economy. The quantity variables dominated as the transmission Channel of monetary policy.
Reforms during the 1990s enhanced the sensitivity of price Signals of price signals from the
central bank, making interest rates the increasingly Dominant transmission channel of monetary
policy in India. The openness of the economy, as measured by the ratio of merchandise
trade(exports Plus imports) to GDP, rose from about 18% in 1993-94 to about 26% by 200304.Including services trade plus invisibles, external transactions as a proportion of GDP Rose
from 25% to 40% during the same period. Along with the increase in trade as a Percentage of
GDP, capital inflows have increased even more sharply, foreign currency Assets of the reserve
bank of India(RBI) rose from USD 15.1 billion in the march 1994 To over USD 140 billion by
march 15,2005.These changes have affected liquidity and Monetary management. Monetary
policy has responded continuously to changes in Domestics and international macroeconomic
conditions. In this process, the current monetary operating framework has relied more on
outright open market operations and Daily repo and reserve repo operations than on the use of
direct instruments. Overight Rate is now gradually emerging as the principal operating target.
The Monetary and Credit Policy is the policy statement, traditionally announced twice a year,
through which the Reserve Bank of India seeks to ensure price stability for the economy. These
factors include - money supply, interest rates and the inflation.
Objectives of Monetary Policy
It is concerned with the changing the supply of money stock and rate of interest for the purpose
of stabilizing the economy by influencing the level of aggregate demand.
At times of recession monetary policy involves the adoption of some monetary tools
which tends to increase the money supply and lower interest rate so as to stimulate aggregate
demand in the economy.
At the time of inflation monetary policy seeks to contract aggregate spending by
tightening the money supply or raising the rate of return
DATE
Bank Rate
DATE
Bank Rate
15 - July 2013
Bank
Rate
10.25
36221
25942
03 - May 2013
8.25
35914
24899
19 - March 2013
8.5
35888
10
23790
8.75
35873
10.5
23646
17-April-2012
35812
11
23014
4.5
13-Feb-2012
9.5
35725
20956
29-Apr-2003
35607
10
18947
3.5
30-Oct-2002
6.25
35536
11
13116
23-Oct-2001
6.5
33520
12
12970
3.5
2-Mar-2001
33423
11
17-Feb-2001
7.5
29779
10
22-Jul-2000
27233
2-Apr-2000
26815
SLR
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%.
CRR
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
Direct Action
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.
This is RBI Governor D Subbarao's last policy before expiry of his five year term.
The word fisc means state treasury and fiscal policy refers to policy c o n c e r n i n g
the use of state treasury or the govt. finances to achieve
t h e macroeconomic goals. any decision to change the level, composition or timing of
govt. Expenditure or to vary the burden, the structure or frequency of the tax payment is fiscal
policy F e d e r a l t a x a t i o n a n d s p e n d i n g p o l i c i e s d e s i g n e d t o l e v e l o u t t h e
b u s i n e s s c y c l e a n d a c h i e v e f u l l e m p l o y m e n t , p r i c e s t a b i l i t y, a n d s u s t a i n e d
g r o w t h i n t h e economy. Fiscal policy basically follows the economic theory of the
20th-centuryE n g l i s h
economist
John
Maynard
Keynes
that
i n s u f f i c i e n t d e m a n d c a u s e s unemployment and excessive demand leads to
inflation. It aims to stimulate demand and output in periods of business decline by
increasing government purchases and cutting taxes, thereby releasing more
disposable income into the spending stream, and to correct overexpansion by
reversing the process. Working to balance these d e l i b e r a t e f i s c a l m e a s u r e s
a r e t h e s o - c a l l e d b u i l t - i n s t a b i l i z e r s , s u c h a s t h e progressive income
tax and unemployment benefits, which automatically respond counter cyclically.
Fiscal policy is administered independently of Monetary Policy by w h i c h t h e
Federal Reserve Board attempts to regulate economic activity by
controlling the money supply. The goals of fiscal and monetary policy are the same, but
Keynesians and Monetarists disagree as to which of the two approaches works
best. At the basis of their differences are questions dealing with
t h e v e l o c i t y (turnover) of money and the effect of changes in the money supply on the
equilibrium rate of interest (the rate at which money demand equals money supply. Measures
employed by governments to stabilize the economy, specifically by adjusting the levels and
allocations of taxes and government expenditures. When the economy is sluggish, the
government may cut taxes, leaving taxpayers with extra cash to spend and thereby
increasing levels of consumption. An increase in public- works spending may likewise
pump cash into the economy, having an expansionary effect. Conversely, a decrease in
government spending or an increase in taxes tends to cause the economy to contract. Fiscal
policy is often used in tandem with monetary policy. Until the 1930s, fiscal policy aimed
at maintaining a balanced budget; since t h e n i t h a s b e e n u s e d " c o u n t e r
c y c l i c a l l y , " a s r e c o m m e n d e d b y J o h n M a y n a r d Keynes, to offset the
cycle of expansion and contraction in the economy. Fiscal policy is more effective
at stimulating a flagging economy than at cooling an inflationary o n e , p a r t l y
b e c a u s e s p e n d i n g c u t s a n d t a x i n c r e a s e s a r e u n p o p u l a r a n d p a r t l y because
of the work of economic stabilizers. F i s c a l p o l i c y i s m a n i f e s t e d i n a
g o v e r n m e n t ' s p o l i c i e s o n t a x a t i o n a n d expenditures. To obtain funds for
their operation, government units generally collect some form of taxes. The
expenditure of these funds not only provides goods and services for constituents,
but has a direct impact on the economy. For example, if expenditures are larger than
the funds received by the government, the resulting d e f i c i t t e n d s t o s t i m u l a t e
t h e e c o n o m y, a s g o o d s a n d s e r v i c e s a r e p r o d u c e d f o r government purchase.
In contrast, if a government runs a surplus by not spending all the funds it collects,
economic growth will generally be curtailed, as the surplus funds are removed from
circulation in the economy
The combined Receipts and expenditures of the state and central government as the % of GDP
Total Receipts
1990-99
26
2000-01
28.5
2004-05
28.2
2007-08
27.8
2009-10 BE
31.4
Rev. Receipts
18.1
17.5
19.5
22.2
21.6
Cap. Receipts
7.9
11
8.7
5.6
9.8
Total Expense
26.8
28.6
27.6
27.4
31.9
Revenue Expense
22.3
24.5
23.2
22.4
27.1
Capital Expense
4.5
11
4.4
4.8
2000-01
2004-05
2007-08
2009-10 BE
Revenue Deficit
4.2
3.6
0.2
5.5
Fiscal deficit
7.7
9.9
7.5
4.2
10.2
Primary deficit
2.7
3.7
1.3
4.6
1990-99
63.2
2000-01
70.6
2004-05
81.4
2007-08
75.1
2009-20 BE
76.5
Fiscal policy
Total Expenditure
Revenue Expenditure
Capital Expenditure
Plan Expenditure
2013-2014
16,65,297
14,36,168
2,29,129
5,55,322
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