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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

The supply of money


Cost of money or rate of interest
The availability of money for achieving specific objectives.

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

To ensure the economic stability at full employment or potential level of output.


To achieve price stability by controlling inflation and deflation.
To promote and encourage economic growth in the economy

FACTORS AFFECTING MONETARY POLICY

There exists a non-monetized sector


Excess of non-banking financial institutions (NBFI)
Existence of unorganized financial market
Money not appearing in an economy
Time lag affects success of monetary policy
Monetary policy and fiscal policy lacks coordination

Instruments of Monetary Policy


Bank Rate
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%
Past Bank Record
DATE

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

29- January -2013

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%.

Open Market Operations


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

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

Repo Rate and Reverse Repo Rate


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
Margin Requirement
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, and 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.
Moral Persuation
Reserve bank can also exercise moral influence upon the member 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.

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.

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.

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

Main objectives fiscal policy

Development by effective mobilization of resources.


Efficient allocation of financial resources
Reduction in inequality of income and wealth
Price stability and control inflation
Employment generation
Capital formation
Development of infrastructures

There are four major of instruments of fiscal policy


1.
2.
3.
4.

Budgetary surplus and deficit


Government expenditure
Taxation- direct and indirect
Public debt

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

Revenue, Fiscal and Primary deficit as the % of GDP


1990-99

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

The combined of state and central government debt as the % of GDP


Year

Central and state public Debt

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

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