Economic Policy-monetary policy,significance,drawbacks and validity in present scenario.

JITHIN JOY
Class No:361
PG Department of Commerce
Deva Matha College, India
Course Code : BE03C15

JITHIN JOY . PG Department of Commerce Deva Matha College Kerala,India

Economic policy
Definition
Economic policy refers to the actions
that governments take in the economic field . Such policies
are often influenced by international institutions like
the International Monetary Fund or World Bank as well
as Political Belief and the consequent policies of parties.
Economic Policy -- “medicine” given to cure a “sick”
economy.

It is usually comprised of various measures, through
which the government seeks to influence the overall
economy. There are three methods through which a
government typically seeks to control the economy
with its budget,
The Allocative,
The allocative function refers to how much of the government’s
budget will be allocated to certain projects
 Stabilization, A government may use the
stabilization function to stabilize a nation’s economy by controlling
interest rates or inflation, and by pushing the employment rate
towards full employment and
Distributive functions.
The distributive function of a government’s economic policy refers to
the different levels of taxation and the economic burden that each
economic level must bear

Types of Economic Policies
 Industrial policy
Trade policy
 Foreign Exchange policy
 Fiscal policy
 Monetary policy

MONETARY POLICIES IN INDIA,
AND IT’S SIGNIFICANSE

MEANING
Monetary policy refers to the steps taken by the
Central Bank, Currency board, or other regulatory
committee to regulate the cost & supply of money
& credit in order to achieve the socio-economic
objectives of the economy.

According to D.C.ROWAN ,
Discretionary act undertaken by the
authorities designed to influence (a)
the supply of money (b) cost of money
or rate of interest and (c) the
availability of money.”

Types of Monetary policy
1.InflationTargeting
2.Price LevelTargeting
3.Monetary Aggregates-The growth in money supply
4.Fixed Exchange Rate-The spot price of the currency
5.Gold Standard-The spot price of gold
6.Mixed Policy- Usually interest rates

OBJECTIVES OF
MONETARY POLICY
1. Business cycle management
2. Economic Growth
3. Price stability
4. Controlled expansion of bank credit
5. Promotion of exports
6. Desired distribution of credit
7. BOP equilibrium
8. Equitable distribution of national income
9. Promoting priority sectors

(A)Quantitative Instruments or GeneralTools
These tools are related to the Quantity orVolume of the
money.
I. Bank Rate Policy
II. Open Market Operation
III. Variation in the Reserve Ratios
* CRR- % of net demand & time deposits to be kept in
Central Bank
* SLR- % of reserve maintained in liquid assets
* Repo Rate- Rate at which central bank lends to banks
* Reverse Repo-Rate at which central bank borrows

(B) Qualitative Instruments or SelectiveTools
They are used for discriminating between different uses
of credit
1 . Fixing Margin Requirements
2. Consumer Credit Regulation
3. Publicity
4. Credit Rationing
5. Moral Suasion
6. ControlThrough Directives
7. Direct Action
8. Differential Interest Rate (DIR)

Process of Monetary Policy Formulation

Significance of monetary policy

How Does Monetary Policy
Affect the Economy?
Ans : via Transmission mechanism of monetary
policy
This is the process through which monetary
policy decisions affect the economy in general and the
price level in particular. The transmission mechanism is
characterized by long, variable and uncertain time lags.
Thus it is difficult to predict the precise effect of
monetary policy actions on the economy and price
level.

Significances
1. Managing Financing conditions in the economy
2. The availability of credit
3. Influence on expectations about economic
activity
4. It can affect the prices of goods, asset prices,
exchange rates as well as consumption and
investment.
5. Price (substitution) and income effects
6. Cushion for absorbing economic cycle changes
7. Economic Growth
8. Price stability
9. Promotion of exports
10. Promoting priority sectors

RECENT MOVES IN
INDIAN MONETARY
POLICY

Faulty monetary policies of July 2013
As everyone knows, between the 15th and the 23rd of July, the
RBI announced excessively harsh monetary measures, which
effectively increased the short-term policy rates by 300 basis
points and sharply reduced liquidity. The measures were taken
ostensibly to defend the falling rupee by restricting "speculation".
The diagnosis was fundamentally incorrect. The rupee was not
weakening due to short-run "speculation" but because of a
persisting high CAD, mounting short-term, external debt
obligations and changes in the global environment for capital
flows.
So the cure had little connection with the disease

Challenges
1. Existence of non monetized sector
2. Excess number of NBFC’s
3. Unorganized financial market
4. Higher liquidity hinders monetary policy
5. Time lag in implementation
6. Lack of coordination between monetary and fiscal
policy

Does the RBI’s monetary policy matter any more?
1. Rate adjustment doesn't bring required changes
* Repo rate * Bank borrowing rate
Interest rate is a very indirect tool that affects the
economy. At present, banks borrow around Rs 40,000 cr
from the repo window, and hence even if it is borrowed
for the full year, a 1 percentage point change in repo
affects their cost by Rs 400 cr, which is not much.
2. While the RBI increased rates or kept them elevated,
did it have an impact on inflation?
The onion crisis shows that we cannot really argue that
inflation has come down because of higher interest rates.
evolving and different variety.

3. Merely lowering interest rates, one cannot bring out growth.
4. Borrowers will come in or move out to have the desired effect
even if banks follow the repo rate changes. If demand conditions
are low, they will not be interested in borrowing more when rates
come down.
5 Here, expectations are important. If companies feel that rates
will come down further, they would defer their plans.
6. Foreign factor. Since our economy is an open economy foreign
factors are continuously influence on it. Such influences are
beyond the preview of monetary policy.

CONCLUSION
 Monetary policy can be considered as one of the important
tool for managing economic crisis .
 Monetary policy’s impact cannot be predicted with cent
percentage accuracy.
 Monetary policy alone cannot cure the sickness of the
economy.
 Monetary policy need to coordinate properly with other
economic policies.

References
http://en.wikipedia.org/wiki/Economic_policy
http://www.investopedia.com/terms/m/monetarypolicy.asp
http://economictimes.indiatimes.com/definition/monetary-policy
http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Section&PARAM1=4
%0A
http://www.goodreturns.in/classroom/2013/08/why-is-high-current-account-
deficit-cad-bad-for-india-202532.html
http://www.financialexpress.com
http://in.reuters.com/article/2013/10/29/india-economy-rbi-repo-msf-
idINDEE99S02M20131029
www.global-rates.com
timesofindia.indiatimes.com
http://bcom5.blogspot.in/2012/11/instruments-of-monetary-policy.html
http://www.oenb.at/en/geldp_volksw/geldpolitik/wirtschaft/how_does_moneta
ry_policy_impact_the_economy_.jsp#a16-1740882

thank
you

Economic Policy-monetary policy,significance,drawbacks and validity in present scenario.

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