Monetary Policy

The term monetary policy refers to actions taken by central banks to affect monetary magnitudes or other financial conditions. Monetary Policy operates on monetary magnitudes or variables such as money supply, interest rates and availability of credit.

Monetary policy
The term monetary policy refers to actions taken by central MP is a part of general economic policy of the govt. MP contributes to the achievement of the goals of economic policy. Objective of MP are: Full employment Stable exchange rate Economic growth Reasonable Price Stability Greater equality in distribution of income & wealth Financial stability

Instruments
1. Discount Rate (Bank Rate) 2.Reserve Ratios 3. Open Market Operations

Operation of Monetary Policy

Operating Target
Monetary Base Bank Credit Interest Rates

Intermediate Target
Monetary Aggregates(M3) Long term interest rates

Ultimate Goals
Total Spending Price Stability Etc.

Instruments of Monetary policy

Banks are required to maintain a certain percentage of their deposits in the form of reserves or balances with the RBI .It is called Cash Reserve Ratio or CRR. Discount rate is the rate of interest charged by the central bank for providing funds or loans to the banking system. Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.

Instruments of Monetary policy

Statutory Liquidity Ratio is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The statutory liquidity ratio is a term most commonly used in India. OMOs involve buying (outright or temporary) and selling of government securities by the central bank, from or to the public and banks. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. Thus altering the money supply in the country

Fiscal policy
The word fisc means state treasury and fiscal policy refers to policy concerning the use of state treasury or the govt. finances to achieve the macroeconomic goals. Any decision to change the level, composition or timing of govt. expenditure or to vary the burden ,the structure or frequency of the tax payment is fiscal policy. When the government makes use of its revenue and expenditure programmes and affects the aggregate level of demand for goods and services in the economy, then this action is essentially known as fiscal policy. (Union Budget) Related to fiscal policy are deficits and surpluses. When the governments expenditure exceeds its revenue, then there is a fiscal deficit and the opposite of this is known is fiscal surplus.

Fiscal policy and Macroeconomic goals

Economic Growth: By creating conditions for increase in savings & investment. Employment: By encouraging the use of labor-absorbing technology Stabilization: fight with depressionary trends and booming (overheating) indications in the economy Economic Equality: By reducing the income and wealth gaps between the rich and poor. Price stability: employed to contain inflationary and deflationary tendencies in the economy.

Taxation
Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes. (Progressive tax system) Classified into Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.