MEANING

Monetary policy is an instrument which effect the credit flow in an economy. Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth

Objectives
Price Stability: implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability. Controlled Expansion Of Bank Credit :One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output. Desired Distribution of Credit: Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers. Equitable Distribution of Credit :The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people To Promote Efficiency It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

INSTRUMENTS
GENERAL (QUANTITATIVE) Methods SELECTIVE (QUALITATIVE) Methods

GENERAL (QUANTITATIVE) Methods

Meaning: These methods help in credit control in the economy. Affect total quantity of the credit.

Types
A. Bank rate policy B. Open market policy C. Cash reserve ratio D. Statutory Liquidity ratio

Bank Rate policy

Traditional approach:- Bank rate means on which central bank discounts and rediscount the eligible bills. Todays approach:- Bank rate means the minimum rate on which central bank provides financial accommodation to commercial bank in the discharge of its function as the lender of the last resort.

Repo Rate and Reverse Repo Rate

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.

Effect of Bank rate

Increase in bank rate
Increase in bank rate charge by the central bank on its advance to commercial bank. Commercial bank increase the rate of interest on their loan. Demand for the credits and loan decrease. Flow of the money decrease in the economy Use in inflationary situation

Decrease in bank rate

Decrease in bank rate charge by the central bank on its advance to commercial bank. Commercial bank decrease the rate of interest on their loan. Demand for the credits and loan increase. Flow of the money increase in the economy Use in depression situation

Open Market operation

Its include the sales and purchase by the central bank of . Assets Foreign exchange Gold Government securities Company securities

Use of Open Market operation

In the inflationary situation Central bank decrease the money supply. Central bank sale out the securities to commercial bank and control money supply. In the depressionary situation Central bank increase the money supply. Central bank purchase the securities from the commercial bank.

Cash Reserve Ratio

Commercial bank has to keep a certain percentage of its deposits with central bank. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

STATUTORY LIQUIDITY RATIO

Commercial bank is to keep a certain percentage of its deposit as liquid asset. It control the cash flow in economy. It keeps changes in monetary policy framed by central bank of a country.

Use of C.R.R. & S.L.R

In Inflationary situation o Increased the percentage of cash reserve ratio and Statutory liquidity ratio o It reduces the supply of money in an economy In Depressionary situation o Decreased the percentage of cash reserve ratio and Statutory liquidity ratio o It increases the supply of money in an economy

Function of credit regulation the quantitative methods

For expansion of credit For contraction of credit

Reduce the bank rate Purchase of securities Reduce the C.R.R. Reduce the S.L.R.

Increase the bank rate sales of securities Increase the C.R.R. Increase the S.L.R.

Specific or qualitative Credit Control

Adopt for expansion and contraction of credit to attain specific objective.

Methods of qualitative credit control

Prescription of margin requirements: While giving loans commercial banks against stock or securities it keeps margin. Consumer credit regulation: Credit made available by CBs for purchase of consumer durables Direct action: when CBs does not cooperate with central bank Moral Suasion: means persuasion and request.

Types of Monetary Policy

An expansionary monetary policy (e.g., decrease in interest rates) increases the supply of money. An expansionary monetary policy might be used during a recession to encourage banks to extend credit to consumers and entrepreneurs. A contractionary monetary policy (e.g., increase in interest rates) would conversely shrink the money supply, and might be used to prevent or control inflation during a period of economic growth

Rates (%) Bank Rate Repo Rate Rev. Repo Rate CRR SLR

9.50% 8.50% 7.50% 4.75% 24.00%

w.e.f. 13.02.2012 25.10.2011 25.10.2011 09.03.2012 18.12.2010

MEANING
The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. In short, fiscal policy or budgetary policy consists of steps & measures which the government in order to fulfill the aims of economic policy.

Objective of fiscal policy

To achieve and maintain the full employment in the economy. Attain Economic growth in long term. Achieve economic stability. To guide the allocation of existing resources into socially necessary lines of development.

INSTRUMENTS
PUBLIC EXPENDITURE TAXATION PUBLIC DEBT

PUBLIC EXPENDITURE
Meaning:- There are large number of public expenditure like opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects govt has paid large amount for purchasing and paying wages and salaries all these expenditure are paid after making govt. expenditure policy . Govt. can increase or decrease the amount of public expenditure by changing govt. budget . So , govt. expenditure is technique of fiscal policy by using this , govt. use his fund first on very necessary sector and other will be done after this . Government spending Productive Non-Productive

Types
PUMP PRIMING The government spending which will have the effect of setting the economy going on the way towards full utilization of resources. Example:- Gov Expenditure, building infrastructure etc. COMPENSATORY SPENDING The government spending which will have the effect of setting the social objective and payment of interest on debt. Example:- schools, hospitals, pensions, relief payments etc.

EFFECT
Gov. exp should be reduced in inflation and increased during depressions in case of a deflationary situation in an economy. Therefore it act as a balancing factor between saving & investment

TAXATION
Meaning:- Taxation policy is relating to new amendments in direct tax and indirect tax . Govt. of India passes finance bill every year . In this policy govt. determines the rate of taxes . Govt. can increase or decrease these tax rates and amend previous rules of taxation .Govt.'s earning's main source is taxation . But more tax on public will adverse effect on the development of economy. Source of Revenue Helps Gov. to do there exp. Generated from public

Types of Tax
Direct Tax Direct tax are those tax which a person pay to government directly for himself and can not enforce on other. For example:- income tax, wealth tax etc. Indirect tax Indirect tax are those tax which a person can on others. For example:- service tax, sales tax.

Effect of Taxation
Reduction in taxation Increase the disposable income. Increase the consumption power. Use for offsetting the deflation forces Increase in Taxation Decrease the disposable income. Decrease the consumption power. Use for offsetting the inflation forces.

Public Debt
When Gov. exp. are more then Gov. revenue Government take Public Debt. Deficit financing = Gov. exp. Gov. revenue. If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing , then govt. can take loan from world bank , or take loan from public by issuing govt. securities and bonds Government take the public debt to fulfill the gap between the Gov exp and the revenue.

Types of public debt

Borrowing from public Borrowing from commercial bank Issue of new currency

Effect
Public Debt effect the inflation and deflation If government take the borrowing from public and banks it will decrease the cash flow in the market and increase the deflation. If there is depression in economy government repay the debt the public which increase the cash flow of the money in market.

Limitation of Fiscal Policy

1. After issuing new notes for payment of govt. of expenses , inflation of India is increasing rapidly and in this inflation , prices of necessary goods are increasing very fastly. Living of poor person has become difficult . So , these sign shows the failure of Indian fiscal policy. Govt. fiscal policy has failed to reduce the black money . Even large amount of past minister is in the form of black money which is deposited in Swiss Bank.

2.

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After taking loan from world bank under the fiscal policy's debt technique , govt. has to obey the rules and regulations of world bank and IMF . These rules are more harmful for developing small domestic business of India. After expending large amount for generating new employment under fiscal policy , rate of unemployment is increasing fastly and big lines on govt. employment exchange can be seen generally in working days . Database of employment exchanges are full from educated unemployed candidates .

Some facts and figures

Monetary policy is been framed by Fiscal policy is been framed by Present governor of R.B.I Present Finance minister of India. Current S.L.R. Current C.R.R.. Monetary policy in India framed under which act.