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Monetary policy
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Economics has never been a science and

it is even less now than a few years ago.
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- Paul A. Samuelson
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W h a t is Monetary policy?
Introduction
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Difference between Fiscal and
Monetary Policy
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Fiscal

- Central authority or government.

Monetary

- RBI (India) or Federal Reserve

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(USA).

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- Regulation of Tax or - Regulation of Money supply.
Revenue. ¥

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How it is done? 5

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• Buying & selling of governmentbonds.

• Changing the amount of money that banks

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have to keep as reserve.

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• Changing the interest rate of member
banks. 4

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Effects of control money flow? 5

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• To control the purchasing power.

• To control Inflation.
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• To increase trust on currency.
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Crore Rupees.

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Difference between Fiscal
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& Monetary Policy
Main differences & Summary
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Difference between Fiscal & Monetary 5
policy
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Fiscal policy Monetary Policy
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Fiscal Policy

1.Monetary policy is the macroeconomic

policy laid down by the central bank.
Monetary Policy

1. The aim of most government fiscal

policies is to target the total level of
spending, the total composition of
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2. It involves management of money spending, or both in an economy.
supply and interest rate and is the
demand side economic policy used by
the government of a country to
achieve macroeconomic objectiveslike
inflation, consumption, growth and
2.The two most widely used means of
affecting fiscal policy are changes in
government spending policies or in
government tax policies.
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liquidity.

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3.If a government believes there is not
3.In India, monetary policy of the RBI is enough business activity in an ¥

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aimed at managing the quantity of economy, it can increase the amount
money in order to meet the of money it spends, often referred to
requirements of different sectors of
the economy and to increase the pace
as stimulus spending. 4 78
of economicgrowth.
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Fiscal Policy

1. RBI can implement monetary policy

through open market operations, bank
rate policy, reserve system, credit
Monetary Policy

1.If there are not enough tax receipts to

pay for the spending increases,
governments borrow money byissuing
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control policy and through many other debt securities such as government
policies.

2.Using any of these policies will lead to

changes in the interest rate, or the
money supply inthe economy.
bonds and, in the process, accumulate
debt. This is referred to as deficit
spending.

2.By increasing taxes, governments pull

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money out of the economy and slow

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3.Increasing money supply and reducing business activity. Typically, fiscal
interest rates indicatean expansionary policy is used when the government ¥

policy. The reverse of this is a
contractionary monetarypolicy.
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seeks to stimulate the economy. It
might lower taxes or offer tax rebates
in an effort to encourage economic
growth.
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BIG CONCEPT
Key difference: Summary
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1
 CASH
RESERVE
RATIO

STATUTORY
BANK RATE LIQUIDITY
RATIO

REVERSE REPO
REPO RATIO
RATIO
1.
CASH RESERVE
RATIO
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⊸ Cash Reserve Ratio (CRR) is a

specified
minimum fraction of the total deposits of
customers, which commercial bankshave
to hold as reserves either in cash or as
deposits with thecentral bank.
⊸ CRR is set according to the guidelines of
the central bank of a country.
⊸ Current CRR is 4%.
2.
STATURTORY
LIQUIDITY RATIO
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⊸ SLR stands for Statutory Liquidity Ratio.

⊸ This term is used by bankers and indicates
the minimum percentage of deposits that
the bank has to maintain in form of gold,
cash or other approved securities.
⊸ Current SLR is 21.5%.
3.
REPO RATE
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⊸ Repo rate also known as thebenchmark interest

rate is the rate at which the RBI lends money to the
banks for a short term.
⊸ When the repo rate increases, borrowing from RBI
becomes more expensive. If RBI wants to make it
more expensive for the banks to borrow money, it
increases the repo rate similarly, if it wants to make
it cheaper for banks to borrow money it reduces the
repo rate.
⊸ Current Repo Rate is 6.75%.
4.
REVERSE REPO RATE
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⊸ Reverse Repo rate is the short term borrowing rate

at which RBI borrows money from banks. The
Reserve bank uses this tool when it feels there is
too much money floating in the banking system.
⊸ An increase in the reverse repo rate means that the
banks will get a higher rate of interest from RBI.
⊸ As a result, banks prefer to lend their money to RBI
which is always safe instead of lending it others
which is always risky.
⊸ Current Reverse Repo Rate is 5.75%.
4.
BANK RATE
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⊸ Bank rate in India is determined by Reserve Bank

of India (RBI). It is the rate at which RBI gives loan
to commercial banks without keeping any
collateral.
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Thank You!
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