MONETARY & FISCAL

POLICY
Presented By: (Group 4)

Arjun Kalra 03
Sonali Jain 11
Swati Batheja 23
Tanuj Sayal 25
Anshul Sachdev 83
Archit Aggarwal 175
FLOW OF PRESENTATION
• What is Excess/Deficient Demand?
• Measures to control situation of excess/deficient
demand
• Monetary Policy
• Fiscal Policy
• Current scenario
WHAT IS EXCESS/DEFICIENT DEMAND?

• In economics, Excess demand is when quantity

demanded is more than quantity supplied
• The gap showing excess of aggregate Demand over
aggregate supply- Inflationary gap
• In economics, Deficient demand is when quantity
demanded falls short of quantity supplied
• The gap showing excess of aggregate supply over
aggregate demand- deflationary gap
MEASURES TO CONTROL SITUATION OF EXCESS/DEFICIENT
DEMAND

• Monetary Policy

• Fiscal Policy
MONETARY POLICY

• Policy of the central bank of a country to control

money supply & credit in the economy

• TOOLS of Monetary Policy

Open Cash- Moral

Marginal
Bank Rate Market Reserve Suasion
Requirement
Operation Ratio
BANK RATE
• Rate of interest at which Central Bank lends to
commercial banks.
• In excess demand situation-Bank rate is raised:

 which discourages commercial banks in borrowing

from Central bank & thus-
 lending rate is increased
 makes credit costlier

 induces Households to increase savings

 Restricting Investment & consumption

 Repo rate & Reverse-repo rate

OPEN MARKET OPERATION
• The buying or selling of Government bonds by the
Central Bank in the open market.
• If the Central Bank sells bonds to commercial banks:
 Commercial banks lose cash reserve
 Capacity to offer loans- reduced
 Hence, credit is controlled
• The opposite is true if bonds are bought.
• This is the most widely used instrument in the day to
day control of the money supply
CASH RESERVE RATIO
• Banks in India are required to hold a certain proportion of
their deposits with RBI in the form of cash/cash equivalents.
• This minimum ratio (that is the part of the total deposits  to
be held as cash) is stipulated by the RBI and is CRR.
• CRR is used to

 drain excess liquidity

 release funds needed for the economy

• SLR: The minimum percentage of deposits that the bank has

to maintain in form of gold, cash, government or other
approved securities at the end of a business day.
MARGINAL REQUIREMENT
• Margin is the difference between loan value and
market value of security.
• It is different for different types of loans.

MORAL PERSUATION
• RBI can exercise moral influence upon banks
with a view to pursue its monetary policy.
FISCAL POLICY
• Policy of government pertaining to public
revenue, public expenditure and public debt
• Objectives:
 Balance Public Revenue, Expenditure and Debt.
 Attain economic development and a desirable
employment level.
 To achieve desirable price level

 To achieve desirable income distribution

TOOLS OF FISCAL POLICY
TAXATION
• To tax is to impose a financial charge or other levy upon
a taxpayer (an individual or legal entity) by a state or the
functional equivalent of a state such that failure to pay is
punishable by law.
• Government collects large funds from public by way of
taxes
• These taxes are broadly classified as direct taxes &
indirect taxes
• As a result of taxes, real income of people is diminished
& so also their aggregate demand.
PUBLIC EXPENDITURE
• Aggregate demand(AD) is influenced by government
expenditure.
• On increase in public (govt.) expenditure there is increase
in aggregate demand and vice versa.
• Public expenditure can be of two types

 expenditure incurred to buy goods & services-direct effect

on AD
 without buying goods & services e.g. expenditure Made on
pensions, medical facilities, education by govt. etc-
Indirect effect on AD
PUBLIC DEBT
• Public debt is of two kinds:
 Internal debt
 External debt
• In case of Inflation, Government should resort to
large scale public borrowing to mop-up excess
money with the public.
• In case of deflation, Public borrowing to be
discouraged.
CURRENT SCENARIO

Bank rate:6%
Repo rate:6%
Reverse Repo rate:5%
CRR: 6%
SLR:25%
ANY QUESTIONS?

THANK YOU !