IMPACT OF MONETARY POLICY AND FISCAL POLICY ON INVESTMENT
MONETARY POLICY
Monetary policy is a programme of action undertaken by the monetary authorities, generally the central bank to control and regulate the demand for and the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. Control of money supply is the main objective of monetary policy.
INSTRUMENTS OF MONETARY POLICY
The measures of monetary policy are generally classified under two categories 1. Quantitative measures 2. Selective credit controls
1)
y y y
QUANTITATIVE MEASURES
Otherwise known as traditional measures. Three types Open Market Operations Discount Rate or Bank Rate Cash Reserve Ratio (CSR)
? OPEN MARKET OPERATION
The open market operation comprises sale and purchase of government securities and treasury bills by the central bank of the country. y The central bank carries out its open market operations through the commercial banks , it does not deal directly with the public.
y
? DISCOUNT RATE OR BANK RATE POLICY
The RBI Act 1935 defines bank rate as the standard rate at which ( the bank ) is prepared to buy or rediscount bill of exchange or other commercial papers eligible for purchase under this Act y The central bank can change this rate depending on the flow of credit from the commercial bank.
y
? CASH RESERVE RATIO or STATUTORY RESERVE RATIO
y The Cash Reserve Ratio (CRR) is the percentage of
total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank y The objectives of the CRR is to prevent the shortage of cash in meeting the demand for cash by the depositors.
2) SELECTIVE CREDIT CONTROLS
It includes the following credit control measures, y Credit rationing y Change in lending margins y Moral suasion y Direct controls
? CREDIT RATIONING
It include three measures, y Imposition of upper limits on the credit available to large industries and firms. y Charging a higher or progressive interest rate on bank loans beyond a certain limit. y Providing credit to weaker sectors at lower interest rate.
? CHANGE IN LENDING MARGINS
y The banks provide loans only up to a certain percentage
of the value of the mortgaged property .The gape between the value of the mortgaged property and amount advanced is called lending margins.
? MORAL SUASION
y The moral suasion is a method of persuading and
convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country.
? DIRECT CONTROLS
y Where all other methods prove ineffective, the
monetary authorities resort to direct central measures with clear directive to the banks to carry out their lending activity in a specified manner.
REPO AND REVERSE REPO RATES
y Repo rate is the rate that RBI charges the bank when
they borrow from the RBI. y Reverse repo rate is the rate that it offers the banks willing to keep their money with it.
OBJECTIVES OF MONETARY POLICY
y Price stability y Credit availability y Stability of exchange rates y Full employment y High growth of economic situations y Distribution of money
FISCAL POLICY
y The fiscal policy refers to the government policy of
changing its taxation and public expenditure programmes intended to achieve certain predetermined objectives.
OBJECTIVES OF FISCAL POLICY
y To strike a balance between government revenue,
expenditure and borrowings. y To attain best possible level of economic development. y To achieve full employment. y To reduce inequality of income and wealth.
TOOLS OF FISCAL POLICY
y Taxation y public expenditure y public debt y Deficit financing y Budget announcement
doc_607228487.pptx
MONETARY POLICY
Monetary policy is a programme of action undertaken by the monetary authorities, generally the central bank to control and regulate the demand for and the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. Control of money supply is the main objective of monetary policy.
INSTRUMENTS OF MONETARY POLICY
The measures of monetary policy are generally classified under two categories 1. Quantitative measures 2. Selective credit controls
1)
y y y
QUANTITATIVE MEASURES
Otherwise known as traditional measures. Three types Open Market Operations Discount Rate or Bank Rate Cash Reserve Ratio (CSR)
? OPEN MARKET OPERATION
The open market operation comprises sale and purchase of government securities and treasury bills by the central bank of the country. y The central bank carries out its open market operations through the commercial banks , it does not deal directly with the public.
y
? DISCOUNT RATE OR BANK RATE POLICY
The RBI Act 1935 defines bank rate as the standard rate at which ( the bank ) is prepared to buy or rediscount bill of exchange or other commercial papers eligible for purchase under this Act y The central bank can change this rate depending on the flow of credit from the commercial bank.
y
? CASH RESERVE RATIO or STATUTORY RESERVE RATIO
y The Cash Reserve Ratio (CRR) is the percentage of
total deposits which commercial banks are required to maintain in the form of cash reserve with the central bank y The objectives of the CRR is to prevent the shortage of cash in meeting the demand for cash by the depositors.
2) SELECTIVE CREDIT CONTROLS
It includes the following credit control measures, y Credit rationing y Change in lending margins y Moral suasion y Direct controls
? CREDIT RATIONING
It include three measures, y Imposition of upper limits on the credit available to large industries and firms. y Charging a higher or progressive interest rate on bank loans beyond a certain limit. y Providing credit to weaker sectors at lower interest rate.
? CHANGE IN LENDING MARGINS
y The banks provide loans only up to a certain percentage
of the value of the mortgaged property .The gape between the value of the mortgaged property and amount advanced is called lending margins.
? MORAL SUASION
y The moral suasion is a method of persuading and
convincing the commercial banks to advance credit in accordance with the directive of the central bank in the economic interest of the country.
? DIRECT CONTROLS
y Where all other methods prove ineffective, the
monetary authorities resort to direct central measures with clear directive to the banks to carry out their lending activity in a specified manner.
REPO AND REVERSE REPO RATES
y Repo rate is the rate that RBI charges the bank when
they borrow from the RBI. y Reverse repo rate is the rate that it offers the banks willing to keep their money with it.
OBJECTIVES OF MONETARY POLICY
y Price stability y Credit availability y Stability of exchange rates y Full employment y High growth of economic situations y Distribution of money
FISCAL POLICY
y The fiscal policy refers to the government policy of
changing its taxation and public expenditure programmes intended to achieve certain predetermined objectives.
OBJECTIVES OF FISCAL POLICY
y To strike a balance between government revenue,
expenditure and borrowings. y To attain best possible level of economic development. y To achieve full employment. y To reduce inequality of income and wealth.
TOOLS OF FISCAL POLICY
y Taxation y public expenditure y public debt y Deficit financing y Budget announcement
doc_607228487.pptx