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MACROECONOMIC POLICIES

Fiscal Policy
Related to
budget, Govt.
Exp., Taxation,
Public Debt

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Monetary
Policy
Related to Ms,
Exchange rate
control, Bank
rate control,
Interest Rate
2

MONETARY POLICY
Regulation of supply of Money & Cost,
Availability of Credit in the economy

Purpose of Monetary Policy

Macroeconomic stability - Maintain price
stability, ensure adequate flow of credit to
the productive sectors of the economy &
overall economic growth
Variables affected by Monetary Policy in the
economy
Interest Rates
Liquidity
Credit Availability
Rates
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AM
3

OBJECTIVES OF M. P.
Monetary policy is an instrument which
affect the credit flow in an economy.
The variation affect the demand & supply
of credit in an economy & the level or
nature of economic activities
Stability in price level
Economic development
Arrangement of full employment
Expansion of credit facility
Stability in exchange rate
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INSTRUMENTS OF M. P.
GENERAL (QUANTITATIVE) Methods
SELECTIVE (QUALITATIVE) Methods

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GENERAL (QUANTITATIVE)
METHODS

Helps in credit control in the economy.

Affect total quantity of the credit.
Methods of general monetary policy
Bank Rate Policy
Open Market Policy
Cash Reserve Ratio
Statuary Liquidity Reserve Ratio
Repo Rate
Reverse Repo Rate
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MONETARY POLICY
INFLUENCE
Policy Variables
- Money supply

Target Variables
-Inflation
-Interest rate

- OMO: Liquidity

-Real GDP

conditions

-Employment

- policy rates (CRR,

-Consumption

repo etc.)

-Savings
-Investment

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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.
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EFFECTS OF BANK RATE

in
bank
rate

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Commer
-cial
banks
interest
rate

Demand
for
credit &
loans

Flow of
money

Demand
for credit
& loans

Flow of
money

OPEN MARKET OPERATION

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

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10

USE OF O. M. O.

In The
Inflationary
Situation

In The
Recessionary
Situation

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RBI sales
out the
securities
to
commercial bank
RBI
purchases
securities
from
commercia
l bank.

RBI
decreases
the money
supply

RBI increases
the money
supply.

11

CASH RESERVE RATIO

Commercial bank by law has to keep a
certain percentage of its deposits with
central bank.
It controls the cash flow in economy.

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12

STATUARY LIQUIDITY RATIO

Commercial bank is to keep a certain
percentage of its deposit as liquid asset.
It controls the cash flow in economy.

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13

USE OF C.R.R. & S.L.R

In Inflationary
Situation

In Recessionary
Situation

Increase the percentage

of CRR & SLR

Decrease the percentage

of CRR & SLR

Reduces the Ms in an
economy

Increases the Ms in an
economy

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14

MEANING OF REPO RATE

Repurchase Agreement or Ready Forward
[REPO].
A Repo involves a simultaneous "sale and
repurchase" agreement.
It enables collateralized short term borrowing
and lending through sale/purchase operations in
debt instruments
Repo rate is the interest rate charged by the
Central bank when banks borrow money from it
against pledging its securities
RBI increases the repo rate loans to banks
costlier
Similarly, RBI decreases repo rate loans to
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15
banks cheaper.

REVERSE REPO

The rate at which RBI borrows money from the

banks (or banks lend money to the RBI) is termed
the reverse repo rate.
If the reverse repo rate is increased RBI will
borrow money from the bank offer them a
lucrative rate of interest banks would prefer to
keep their money with the RBI (which is
absolutely risk free) instead of lending it out (this
option comes with a certain amount of risk)
Consequently, banks would have lesser funds to
lend to their customers. This helps stem the flow
of excess money into the economy
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16

IMPORTANCE OF REPO & REVERSE

REPO
Reverse repo rate -- the rate at which the
central bank absorbs liquidity from the
banks
Repo -- the rate at which liquidity is
injected
It helps borrower to raise funds at better rates
An SLR surplus and CRR deficit bank can use
the Repo deals as a convenient way of adjusting
SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments
for liquidity adjustment in the system
Reverse Repo is undertaken to earn additional
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17
income on idle cash.

SUMMARY OF QUANTITATIVE
METHODS
EXPANSION OF
CREDIT

CONTRACTION
OF CREDIT

Reduce Bank Rate

Increase Bank Rate

Purchase of securities

Sales Of Securities

Reduce C.R.R.

Increase C.R.R.

Reduce S.L.R

Increase S.L.R.

Reduce Repo Rate

Increase Repo Rate

Reduce Reverse Repo

Rate
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Increase Reverse
Repo Rate

18

SPECIFIC/QUALITATIVE
CREDIT CONTROL
Adopt for expansion and contraction of
credit to attain specific objective.
Methods of qualitative credit control

Credit rationing
Change in margin
Direct action
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19

LIMITATIONS OF M. P.
Conflicting Goals
Limitations During Deflation
Limitations During Inflation
Near Money Assets
NBFIS

Attitude Of Banks
Limitation In Underdeveloped Countries
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Inside
& Outside Lag

20

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21

HISTORY
Importance of Fiscal Policy Post Great Depression
The ineffectiveness of monetary policy as a
means of overcoming the severe unemployment
of the Great Depression
The development of the new economics by
Keynes with its emphasis on aggregate demand.
Fiscal policy is based on the theories of British
economist John Maynard Keynes [also known as
Keynesian Economics]

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22

MEANING
Measures related to taxation & public
expenditure are normally called fiscal
measures and the policy concerning them
is known as FISCAL POLICY.
In short, fiscal policy or budgetary policy
consists of steps & measures which the
government implements to fulfill the aims
of economic policy.
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23

FISCAL POLICY INFLUENCE

TARGET VARIABLES
Aggregate Demand

INSTRUMENTS
Public Revenue
Public Spending
Public Debt

Inflation
Employment
Consumption
Savings
Investment

[resource allocation]
Income Distribution

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24

OBJECTIVES OF F. P.
To achieve and maintain
employment in the economy.

the

full

Attain Economic growth in long term.

Achieve economic stability.

To guide the allocation of existing
resources into socially necessary lines of
development.
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25

INSTRUMENTS OF F. P.
PUBLIC EXPENDITURE
Plan & Non - Plan
Development & Non- Development

PUBLIC REVENUE
Tax
Non - Tax

PUBLIC DEBT
Internal Debt
External Debt
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PUBLIC EXPENDITURE
Revenue Expenditure

Capital Expenditure

Plan Expenditure
Plan Expenditure
Central Plan such as
Developmental Projects
agriculture, rural
development, social service
and others
Central Assistance for plans
to States and UTs
Non Plan Expenditure
Interest Payments
Subsidies
Debt relief to farmers
Grant to states and UTs
Others
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Non Plan Expenditure

Loans to PSUs
Loans to states and UTs
Defense
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EFFECTS OF P. E.
Govt. 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
Pump Priming - The government spending which
will have the effect of setting the economy going
on the way towards full utilization of resources.
E.g. Govt. Exp., building infrastructure etc.
Compensatory Spending - The government
spending which will have the effect of setting the
social objective and payment of interest on debt.
E.g. schools, hospitals, pensions, relief payments
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28
etc.

Public Revenue
Revenue Receipts
Tax Revenue: Direct Taxes
Income Tax
Corporate Tax
Wealth Tax
Indirect Taxes

Customs
Excise
Others
Non Tax Revenue
Interest receipts
Dividend
Profits of PSUs
Revenue from social services
like education and hospitals
External Grants
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Capital Receipts
Market Borrowing-internal debt
Disinvestment of PSUs
Recoveries of loans
Borrowing from external markets
External loans/Debts from
world institutions

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TAXATION
Meaning:Source of Revenue
Helps Govt. to do there exp.
Generated from public

Direct Tax - Direct tax are those tax

which a person pay to government
directly for himself and can not enforce
on others, for e.g. income tax, wealth tax
etc.
Indirect Tax - Indirect tax are those tax
which a person can on others, for e.g.
service tax, sales tax etc.
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30

Public Debt
When Govt. exp. are more then Govt.
revenue Government take Public Debt.
Deficit financing = Govt. exp. Govt.
revenue.
Government take the public debt to fulfill
the gap between its exp. and the revenue.
Government debt can be categorized as
internal debt-owed to lenders within the
country, and external debt-owed to foreign
lenders.
Government Borrowing leads to Crowding
out effect
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CROWDING OUT EFFECT

In economics, when the government expands its
borrowing to finance increased expenditure, crowding
out occurs of private sector investment by way of
higher interest rates
If increased borrowing leads to higher interest rates
by creating a greater demand for money and loanable
funds and hence a higher "price" (ceteris paribus), the
private sector, which is sensitive to interest rates will
likely reduce investment due to a lower rate of return.
This is the investment that is crowded out.
More importantly, a fall in fixed investment by
business
can hurt long-term economic growth of 32the
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supply side, i.e., the growth of potential output.

INDICATORS OF FISCAL
IMBALANCES
Revenue Deficit
Revenue expenditure is met out of current
revenue receipts

Revenue Deficit = R. Exp. R. Receipts

Fiscal Deficit
It is the difference between the government's
total receipts (excluding borrowing) and total
expenditure.
Fiscal deficit gives the signal to the government
about the total borrowing requirements from all
sources.
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33

WAYS AND MEANS ADVANCES

- NEW SCHEME [WMA]
Under the new scheme RBI provides facilities for
temporary accommodation up to a ceiling fixed in
advance
The limit for WMA and rate of interest on WMA
will be mutually agreed to between the Reserve
Bank and govt. from time to time
The credit thus drawn has to be repaid or in
technical language Govt. vacates WMA from time
to time.
As a result WMA will be reduced to zero at the
end of financial year
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34

LIMITATIONS OF F. P.
Limitations during deflation
Limitations during inflation
Limitations in underdeveloped countries
Lack of adequate forecasting
Size of fiscal measures
Changes in the B.O.Ps
Nature of peoples efforts
Burden of public debt
Problems relating to deficit Financing
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35

CURRENT GLOBAL SCENARIO

Global GDP 0.6%

Tighter
credit

World trade
contraction
by 2.8%

Recession
Estimated PPP
Global Growth
0.5%

Production
Plunge
Demand
Slump
Job losses

Aggressive and unconventional measures taken by

Governments and central banks
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IMPACT ON INDIA
Money and credit market
Domestic
Banks
Local
Institutions
Domestic
MFs

NBFC

R
e

Financial Channel
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CHALLENGES FOR RBI

Monetary
Policy

Fiscal Policy

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Growth Amid
Global Economic Slowdown

38

CURRENT RATES
Inflation
Bank Rate

7.25 (June 12)

9.0% http://www.rbi.org.in/home.aspx

CRR

4.75%

SLR

24.0%

Repo Rate

8.0%

Reverse Repo Rate 7.0%

Base Rate
Re/$

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10.0% 10.50%
55.76

39

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..

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