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MONETARY AND

FISCAL POLICY

Monetary & Fiscal Policy Prof. Parulm Gupta 1


Monetary Policy

• The objective of monetary policy has


been clearly enunciated as price
stability while ensuring provision of
adequate credit for productive purposes.
• The main contribution of monetary policy
to poverty alleviation is thus ensuring
price stability in a growth-environment

Monetary & Fiscal Policy Prof. Parulm Gupta 2


Fiscal Policy
• An important area of overlap
between financial sector and fiscal
policy relates to taxation as also tax
exemptions or concessions to
financial instruments and
institutions. To the extent tax free
status is given to a large segment of
financial instruments .

Monetary & Fiscal Policy Prof. Parulm Gupta 3


MONETARY POLICY
REFORMS
• Objectives
– Price stability
– Ensuring adequacy of credit to support
growth
– Financial Stability
• Instruments
– Move from direct to indirect instruments
• LAF ( Liquidity Adjustment Facility )
• OMO (open market operation)
• MSS ( Market Stabilisation Scheme )

Monetary & Fiscal Policy Prof. Parulm Gupta 4


Developmental Measures
1. Discontinuation of automatic monetisation through
an agreement between the Government and the Central
Bank. Rationalisation of Treasury Bill market.
Introduction of delivery versus payment system and
deepening of inter-bank repo market.
2. Introduction of Primary Dealers in the government
securities market to play the role of market maker.
3. Amendment of Securities Contracts Regulation Act
to create the regulatory framework.
4. Deepening of government securities market by
making the interest rates on such securities market
related.

Monetary & Fiscal Policy Prof. Parulm Gupta 5


• Introduction of auction of government
securities. Development of a risk-free credible
yield curve in the government securities market as
a benchmark for related markets.
• Development of pure inter-bank call money
market. Non-bank participants to participate in
other money market instruments.
• Introduction of automated screen-based
trading in government securities through
Negotiated Dealing System (NDS). Setting up
of risk-free payments and system in government
securities through Clearing Corporation of India
Limited (CCIL). Phased introduction of Real Time
Gross Settlement (RTGS) System.
• Deepening of forex market and increased
autonomy of Authorised Dealers.

Monetary & Fiscal Policy Prof. Parulm Gupta 6


Among the measures taken in this
direction, are
• elimination of system of automatic
monetisation of budget deficit,
• clearer delineation of roles between the
Reserve Bank of India (RBI) and Government in
financing of development by keeping levels of
monetisation consistent with inflation and
growth objectives,
• reduction in fiscal dominance by attempting
to reduce deficits, and improvements in
monetary policy-transmission, through market
integration as part of financial sector reforms,
especially in banking sector.
The implications of each of these measures in terms
of changing expectations on the role of the RBI,
perhaps need to be detailed.
Monetary & Fiscal Policy Prof. Parulm Gupta 7
4. cross-subsidisation

• In the past as part of the regime of administered


interest rates, the banking and financial institutions
were providing loans on concessional terms to
certain sectors and also certain categories of
borrowers, leading to cross-subsidisation. The credit
allocation by banks was also directed to many such
sectors/borrowers through various target
prescriptions.
• Thus, while discontinuing Funds, net transfer of profits
of the RBI as dividend has increased from Rs.200 crore
in 1991-92 to Rs. 2,000 crore in 1998-99.
• No doubt, there still exists flow of concessional funds under
General Line of Credit (GLC) for rural development.
Thus, the overall responsibility and accountability in regard
to use of such monetised resources have been clearly
delineated.
Monetary & Fiscal Policy Prof. Parulm Gupta 8
5.Modified interest rate
prescriptions

• the RBI has introduced modified interest


rate prescriptions, linking concessionality
to size of credit limits, rather than to
specified sectors or groups of borrowers.
Thus, for small borrowers with credit limits
up to Rs.2 lakh, the maximum rate
applicable is Prime Lending Rate (PLR),
which is the rate charged for the best
borrowings by a bank.
Monetary & Fiscal Policy Prof. Parulm Gupta 9
Conclusion
• In brief, monetary policy is increasingly
focused on efficient discharge of its
objectives, that no doubt help poverty
alleviation, albeit indirectly, while the more
direct attack on poverty alleviation would
rightfully be the preserve of fiscal policy,
aided by conducive monetary and financial
conditions

Monetary & Fiscal Policy Prof. Parulm Gupta 10

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