Scribd
Upload
66 views

CH-1.3 Monetary & Fiscal Policy

This document provides an overview of monetary policy and its key concepts. It discusses how monetary policy uses tools like adjusting interest rates, reserve requirements, open market operations and credit ceilings to control money supply and promote economic stability. The objectives of monetary policy are outlined as controlling inflation, economic growth, price stability, reducing unemployment and managing currency exchange rates. The types of monetary policy, including expansionary, contractionary and unconventional policies, are also summarized. Key differences between the bank rate and repo rate are defined.

Uploaded by

Amrit Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
66 views

CH-1.3 Monetary & Fiscal Policy

This document provides an overview of monetary policy and its key concepts. It discusses how monetary policy uses tools like adjusting interest rates, reserve requirements, open market operations and credit ceilings to control money supply and promote economic stability. The objectives of monetary policy are outlined as controlling inflation, economic growth, price stability, reducing unemployment and managing currency exchange rates. The types of monetary policy, including expansionary, contractionary and unconventional policies, are also summarized. Key differences between the bank rate and repo rate are defined.

Uploaded by

Amrit Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 21

University School of Business

Bachelor of Commerce
Management of Financial Institution
(CMT-224)

Monetary Policy and


Fiscal Policy DISCOVER . LEARN .
EMPOWER
Course Outcome

2
What is Monetary Policy?
• Monetary policy is the process by which the monetary authority i.e.
Central bank of a country controls the supply of money, often targeting
a rate of interest for the purpose of promoting economic growth and
stability.
1. The supply of money
2. Availability of money and
3. Rate of interest
In order to attain a set of objectives oriented towards the growth and
stability of the economy.
OBJECTIVES OF MONETARY POLICY

https://theinvestorsbook.com/monetary-policy-vs-fiscal-policy.html
Objectives of Monetary Policy

Monetary policy is primarily used by the central bank to


control unfavourable economic conditions and crisis. Its
various other purposes mentioned below:
• Control Inflation: Expansionary monetary policy is applied to
deal with the economic situation like high inflation.
• Economic Growth: The gross domestic product (GDP),
determines the growth of a nation’s economy. Thus
monetary policy focuses on increasing the GDP of a country.
• Price Stability: At the time of recession and inflation, the
monetary policy tries to bring stability to the price of goods
and services.
Objectives of Monetary Policy

• Reduce Unemployment: It also aims at reducing


unemployment in a nation by promoting business and trade
activities.
• Regulate Currency Exchange Rates: The central bank uses
monetary policy to manage the exchange rates by regulating
the supply of domestic and foreign currencies.
• Social Welfare: Another vital purpose of this policy is to
facilitate social welfare like redistribution of wealth, to
control the prices of goods and services and attaining
monetary stability.
TYPE of Monetary Policy
TYPE OF MONETARY POLICY

• https://www.safalniveshak.com/does-monetary-policy-really-impact-stock-prices/
TYPES OF MONETARY POLICY
• Expansionary Monetary Policy
• The monetary policy which is adapted to increase the supply
of money in the market to control recession is termed as
expansionary monetary policy.
• The corrective measure used under this policy includes
lowering of the various interest rates, decreasing the reserve
requirements of the banks and purchasing or buying back of
the government bonds and securities to infuse money in the
economy.
• Contractionary Monetary Policy
• Opposite to the expansionary policy, the contractionary
policy deals with situations like inflation by withdrawing the
surplus money from the economy.
• For this purpose, the central bank raises the interest rates,
increases the reserve requirements of the banks and sell out
the government bonds and securities to the public.
TYPES OF MONETARY POLICY
• Unconventional Monetary Policy
• The alternative monetary policy comes into action when
both the expansionary and contractionary policies fail to
control the situation of the extreme financial crisis in a
country.
• One of the ways adopted is quantitative easing is where the
central bank buys government securities to increase the flow
of money in the economy. On the other hand, the central
bank supplies the financial institutions with ample capital to
give out as loans for increasing liquidity in the market.
TOOLS/ INSTRUMENTS OF
MONETARY POLICY

https://stellariasacademy.online/tools-of-monetary-policy/23/03/
Instruments of Monetary Policy

• Quantitative Credit control:- • Qualitative Credit Control:-


i. Bank Rate Policy i. Credit Ceiling
ii. Cash Reserve Ratio ii. Credit Authorisation Scheme
iii. Statutory Liquidity Ratio iii. Moral Suasion
iv. Open Market Operations. iv. Direct Action
v. Repo and Reverse Repo Rate
Tools/ Instruments of Monetary Policy

• Adjustment of Interest Rates: The primary means to control the


money supply in the economy used by the central bank is modifying
the discount rates, at which it provides short term loans and
advances to the commercial banks.
• Change in Reserve Requirements: Every commercial bank is
supposed to maintain a minimum sum as the reserve, and this
reserve limit is decided by the central bank. Thus, the central bank
fluctuates this minimum reserve requirement limit to deal with
inflation and recession.
Tools/ Instruments of Monetary Policy

• Open Market Operations (OMO): Another useful tool for


infusing and withdrawing money from the economy is the
buying and selling of government bond and securities in
the open market by the central bank.
• Credit Authorization Scheme: Under the Scheme, all
scheduled commercial banks have to obtain prior
authorisation of the Reserve Bank before granting any
fresh credit limit of Rs. 1 crore or more to any single
borrower. This limit was, however, raised to Rs. 2 crores in
1975. The RBI gives more approvals if it has to increase
the money-supply in the economy. On the other hand, it
may withhold certain approvals if it has to decrease the
money supply in the economy.
Tools/ Instruments of Monetary Policy
• Moral Suasion: Communication has proved to be an
efficient way of handling complex issues. Thus, the central
bank uses oral or written communication on the grounds
of morality to make the commercial banks act in the
desired manner, to protect the economic interest of a
nation.
• Credit-Ceiling: In this, RBI issues prior information or
direction that loans to Commercial-Banks will be given
upto a certain limit. Central Bank fixes credit-limit for
each Commercial bank and does not give credit beyond
that limit. Central Bank can increase the money-supply by
increasing the credit-limit and decrease the money-
supply by decreasing the credit-limit.
•.
Difference b/w bank rate & repo rate
• Loan vs. Securities – bank rate usually deals with loans, whereas,
repo or repurchase rate deals with the securities. The bank rate is
charged to commercial banks against the loan issued to them by
central banks, whereas, the repo rate is charged for repurchasing
the securities.
• Using a Collateral – No collateral is involved in a bank rate. But a
repurchase agreement uses securities as collateral, which are
repurchased at a later date.
• Which rate is higher? – If you observe the market, you will find
that repo rate is comparatively lower than a bank rate.
• Time-period-Repo rate is used to lend money for short-period
while bank-rate is used to lend money for long-period.
•
Conclusion
• When monetary policy is a central bank’s financial tool to
deal with inflation and promote economic growth. Fiscal
policy is a finance ministry’s measure using government
revenue and expenditure to facilitate economic
development.
• The monetary policy primarily aims at economic stability,
whereas fiscal policy’s principal objective is to develop the
economy as a whole.
• The principle on which monetary policy functions is the
regulation of money supply in the economy. However, the
law of fiscal policy is influencing the market demand for
goods and services.
• Where the former is highly complex and strategical, the
latter is comparatively less complicated.
• The monetary policy is formulated by the central bank of the
country; fiscal policy is governed by the ministry of finance.
ASSESSMENT PATTERN

18
PRACTICAL APPLICATIONS

• Regulating the flow of currency


• Regulating Interest rate
• Regulating inflation

19
BIBILOGRAPHY & REFERNECES
• www.wikipedia.com
• The Indian Banking Sector On The Road To Progress- G. H. Deolalkar
• Council On Foreign Relations, IIGG Interactive Guide To Global Finance –Article
• Non Banking Institution –Project Report
• VIDEO LINKS
https://www.youtube.com/watch?v=x9VP9BiANHE
https://www.youtube.com/watch?v=LoY9xTx4nm0
https://www.youtube.com/watch?v=tyu7mERG29g

NPTEL VIDEO LINK


https://www.youtube.com/watch?v=Z9_4KTSl380
https://www.youtube.com/watch?v=sXvXdkBhkok

 
THANK YOU

For queries
Email: [email protected]

You might also like