1. UNIT II
Business Environment

2. Indian Financial System
• Monetary Policy
• Fiscal Policy

3. Monetary Policy
…Basics

4. Monetary policy is the process by which
monetary authority of a country, generally
a central bank controls the supply of
money in the economy by exercising its
control over interest rates in order to
maintain price stability and achieve high
economic growth.
What is Monetary Policy??

5. • Monetary policy rests on the relationship
between the rates of interest (price at which
money can be borrowed)in an economy and
the total supply of money.
• Monetary policy uses a variety of tools to
control one or both of these, to influence
outcomes like economic growth, inflation,
exchange rates with other currencies
and unemployment
What is Monetary Policy?..

6. • Monetary theory provides insight into how to craft optimal monetary
policy and can be either expansionary or contractionary.
• An expansionary policy increases the total supply of money in the
economy more rapidly than usual
• Expansionary policy is traditionally used to try to
combat unemployment in a recession by lowering interest rates in
the hope that easy credit will entice businesses into expanding.
Basic Approach to Monetary Policy

7. Contractionary policy expands the
money supply more slowly than usual or
even shrinks it.
Contractionary policy is intended to
slow inflation in hopes of avoiding the
resulting distortions and deterioration of
asset values.
Basic Approach to Monetary Policy…

8. History of Monetary Policy
• For many centuries there were only two forms of monetary
policy: (i) Decisions about coinage; (ii) Decisions to
print paper money to create credit. Interest rates, while
now thought of as part of monetary authority, were not
generally coordinated with monetary policy.
• With the creation of the Bank of England in 1694, which
acquired the responsibility to print notes and back them
with gold, the idea of monetary policy as independent of
executive action began to be established.

9. History of Monetary Policy….
• Central banks as part of the gold standard began setting the interest
rates which they charged, from borrowers who required liquidity. This
required almost monthly adjustments of interest rates.
• During the 1870-1920 period, the industrialized nations set up central
banking systems, with the role of the central bank as the "lender of
last resort”.
• Later, economists evolved ways to control money for financial
stability & growth. Classical economists /Monetarists emphasized
‘money supply’ where as Keynesian economists emphasized the
‘interest rate channel’.

10. Considerations for Monetary Policy
Monetary decisions today take into account a wider range of
factors/monetary variables, such as:
– short term interest rates;
– long term interest rates;
– velocity of money through the economy;
– exchange rates;
– credit quality;
– bonds and equities (corporate ownership and debt);
– government versus private sector spending/savings;
– international capital flows of money on large scales;
– financial derivatives such as options, swaps, futures contracts, etc.

11. Monetary Policy of India

12. Monetary Authority in India
• There are two monetary authorities in India: the Central
government and the RBI. Central government is more
powerful.
• The central monetary authority is the Reserve Bank of
India (RBI)
• RBI formulates, monitors and regulates the monetary policy,
which aims at financial stability in the country.

13. • The process of monetary policy formulation in
India had traditionally been largely internal.
• The process has, over time, become more
consultative and participative with an external
orientation.
• Wide range of inputs taken from various
stakeholders
Monetary Policy Formulation in India

14. • The three concerned research departments –
– Monetary Policy Department (MPD)
– Department of Economic and Policy Research (DEPR) and
– Department of Statistics and Information Management (DSIM)
• Provide independent technical inputs and
assessment
• Meeting chaired by the Governor and attended by
the top management.
Monetary Policy Formulation in India

15. • Consultations are held with
– 20 large commercial banks
– Indian Banks Association (IBA),
– Urban and rural co-operative bank/credit associations
– Association of non-banking financial companies (NBFCs).
• Reserve Bank has constituted a technical advisory
committee (TAC) on monetary policy with outside
(foreign) experts, though its role remains advisory.
Monetary Policy Formulation in India

16. • Monetary policy framework is a continuously
evolving process based on the
– Level of development of financial markets and
institutions
– Degree of global integration.
• Monetary policy framework in India has undergone
significant transformation over time.
Monetary Policy Framework in India

17. • India followed a Monetary Targeting Framework during the
mid-1980s till 1997-98 under which broad money (money
supply-M3) was used as an intermediate target for monetary
policy.
• Recognizing the challenges posed by financial liberalization,
the Reserve Bank switched to a Multiple Indicator Approach
in 1998-99.
• Under the multiple indicator approach, while broad money
continued to remain an information variable, greater
emphasis was placed on rates of interest for monetary policy
formulation.
Monetary Policy Framework in India…

18. INSTRUMENTS OF MONETARY POLICY
• Measures adopted by RBI to control credit:
– Bank Rate of Interest
– Cash Reserve Ratio
– Statutory Liquidity Ratio
– Open market Operations
– Margin Requirements
– Various other Innovative measures

19. Bank Rate of Interest
• It is the interest rate which is fixed by the Central bank
to control the lending capacity of Commercial banks.
• During Inflation , RBI increases the bank rate of interest
due to which borrowing power of commercial banks
reduces which thereby reduces the supply of money or
credit in the economy.
• When Money supply Reduces it reduces the purchasing
power and thereby curtailing Consumption and lowering
Prices.

20. Cash Reserve Ratio
• CRR, or cash reserve ratio, refers to a portion of deposits (as
cash) which banks have to keep/maintain with the Central
bank (RBI).
• During Inflation RBI increases the CRR due to which
commercial banks have to keep a greater portion of their
deposits with the RBI.
• This serves two purposes. It ensures that a portion of bank
deposits is totally risk-free and secondly it enables that RBI
control liquidity in the system, and thereby, inflation.

21. Statutory Liquidity Ratio
• Banks are required to invest a portion of their
deposits in government securities as a part of
their statutory liquidity ratio (SLR)
requirements.
• If SLR increases the lending capacity of
commercial banks decreases thereby regulating
the supply of money in the economy.

22. Open market Operations
• It refers to the buying and selling of Govt.
securities in the open market.
• During inflation RBI sells securities in the open
market which leads to transfer of money to
RBI. Thus money supply is controlled in the
economy.

23. Currency Board
• A currency board is a monetary arrangement that pegs the monetary
base of one country to another, the anchor nation.
• It essentially operates as a hard fixed exchange rate, whereby local
currency in circulation is backed by foreign currency from the anchor
nation at a fixed rate.
• Thus, to grow the local monetary base an equivalent amount of
foreign currency must be held in reserves with the currency board.
• This limits the possibility for the local monetary authority to inflate
or pursue other objectives

24. • RBI is empowered to control credit on a
qualitative basis i.e. on selective manner.
• SCC was first introduced in 1956 to check
speculation activities in the market and thereby
control the flow of credit selectively.
• Stricter controls are imposed on 6 basic groups
of commodities:
– Food grains, sugar, oil seeds, cotton, vegetable oils
and cotton textiles.
Selective Credit Control (SCC)

25. Introduction
to
Fiscal Policy: Meaning,
Objectives &
Instruments

26. THE FISCAL POLICY
•Fiscal policy deals with the taxation
and expenditure decisions of the
government.
•Monetary policy, deals with the
supply of money in the economy and
the rate of interest.

27. Importance of Fiscal Policy
Popularity of the fiscal policy since the 1930s is due to:
• The ineffectiveness of monetary policy as a means of
overcoming the severe unemployment of the Great
Depression.
• The growing importance of government spending and
taxation in relation to the economy's total income and output.

28. OBJECTIVES OF FISCAL POLICY
•The fiscal policy of the government as regards
taxation, public borrowing and public expenditure is
always formulated with specific objectives in view.
•These objective are to produce desirable effects and avoid
undesirable effects on the national income, production,
employment, and general price level
•Economic Stability Vs Economic Development
•In most modern economies, the government deals with
fiscal policy while the central bank(RBI) is responsible
for monetary policy.

29. The main instruments of fiscal policy are
• Taxation
• Public borrowings,
• Forced saving (or deficit financing)
• Public expenditure .
INSTRUMENTS OF FISCAL POLICY

30. Taxation
•Taxation is the most important source of public revenue of
both developed and developing countries.
•More important for developing countries, as the size of
government’s development program depends largely on the
economic and administrative capacity of its tax system to
mobilize the necessary resource.
INSTRUMENTS OF FISCAL POLICY

31. Public Borrowing
•After taxation, public borrowing is the second most
important source of public revenue.
•It is different in nature from taxes, since all
borrowing from the public must be repaid; fund-
raising exercise.
•Two ways to raise public debt
–Voluntary loan: Issue of bills & securities in money market
–Compulsory loan: contribution to provident fund, pension fund etc..
INSTRUMENTS OF FISCAL POLICY

32. Government Securities
Government security is a tradable instrument issued by the Central Government or the State Governments.
It acknowledges the Government’s debt obligation.
Such securities are short term (usually called treasury bills, with original maturities of less than one year) or
long term (usually called Government bonds or dated securities with original maturity of one year or
more).
In India, the Central Government issues both, treasury bills and bonds or dated securities while the State
Governments issue only bonds or dated securities, which are called the State Development Loans
(SDLs).
Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.
Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.)
or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.).
a. Treasury Bills (T-bills)
Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the
Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.
b. Cash Management Bills (CMBs)
The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills,
they are also issued at a discount and redeemed at face value at maturity.
c. Dated Government Securities
Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate)
which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated
securities can be up to 30 years.

33. Forced Saving or Deficit Financing
• A new weapon in the armory of fiscal tools
• Deficit financing occurs when there is excess of
expenditure over current revenue receipts
• It was used during the period of Great Depression in the
1930s to stimulate private investment.
INSTRUMENTS OF FISCAL POLICY….

34. • When a government spends more than what it currently receives in
the form of taxes and fees during a fiscal year, it runs in to a deficit
budget. When the budget deficit is financed by borrowing from the
public and banks, it is called deficit financing.
• Deficit financing refers to the borrowing undertaken by the
government to make up for the revenue shortfall. It is the best
stimulant for the economy in short term. However, in the long term
it becomes a drag on the economy and becomes the reason for rise
in interest rate
Sources of Financing Deficit
• There are three methods or sources which are used to finance
budgetary deficits. Each method of financing has its own macro
economic implications.
• The methods of deficit financing are:
(1) Bank borrowing.
(2) Non-bank borrowing / Domestic Borrowing.
(3) External borrowing.
Deficit Financing….

35. Public Expenditure
Reasons for massive increase in public expenditure are
• Building up of infrastructure and large capital goods
industries.
• Meeting social obligation like provision of cheap or
free public services, education, housing etc.
• Providing subsidies to various sectors particularly the
farm sector.
• Undertaking various public works programs.
INSTRUMENTS OF FISCAL POLICY….

36. • Capital Formation
– Fiscal policy of the country is playing an important role in increasing the rate
of capital formation in the public and private sectors.
• Mobilization of Resources
– Fiscal policy of the country has been helping to mobilize a considerable
amount of resources through taxation, public debt and other sources for
financing its various developmental projects.
• Incentives to Savings
– Providing various incentives to raise the saving rate both in household and
corporate sector by various budgetary policy changes like tax exemption, tax
concession etc.
• Inducement to Private Sector
– Various inducements like subsidies, tax exemptions, concessions etc. are
provided to private sector to expand their activities.
• Reduction of Inequality
– Progressive taxes on income and wealth tax exemption, subsidies etc.
• Export Promotion
– Concessions and subsidies are provided by govt. to promote exports.
• Alleviation of Poverty and Unemployment
– Various poverty eradication and employment generation programmes are
employed in order to reduce poverty and unemployment. Eg: IRDP (Integrated
rural development prog), JRY (Jeevan Rekha Parishad)
Merits of Fiscal Policy of India

37. • Instability
– Failed to achieve stability on various fronts. Growing volume of
deficit financing has created inflationary rise in price levels.
• Defective Tax Structure
– Tax structure has failed to raise the productivity of direct taxes.
Therefore country has been relying on indirect taxes.
• Inflation
– Unable to stop the inflationary rise in price level. The higher rate
of indirect taxation has resulted in cost-push inflation.
• Negative Return of the Public Sector
– In spite of having huge total investment in public sector, the
return on investment has been mostly negative.
• Growing Inequality
– The growing trend of tax evasion has made the tax machinery
ineffective. And the reliance on indirect taxes has made the tax
structure as regressive.
Shortcomings of Fiscal Policy of India

38. India’s Fiscal Policy
:Trends

39. OBJECTIVES OF FISCAL POLICY
IN INDIA
• To improve the growth performance of the
economy - mainly in two ways.
• By mobilizing resources for development.
• By improving the efficiency of resource
allocation
• Fiscal Policy also used to achieve equity.

40. THE FISCAL IMBALANCE

41. THEMES OF THE ‘NEW FISCAL POLICY’
• A systematic effort to simplify both the tax structure and
the tax laws
• A deliberate shift to a regime of reasonable direct tax
rates, combined with better administration and
enforcement, to improve compliance and raise revenues
• The fostering of a stable and predictable tax policy
environment
• Greater recognition and weight given to the resource
allocation and equity consequences of taxation

42. • More reliance on nondiscretionary fiscal and financial
instruments in managing the economy, as compared to
adhoc, discretionary physical controls
• Concerted efforts to improve tax administration and
reduce the scope for arbitrary harassment
• Growing appreciation of the links between fiscal and
monetary policy;
• Fresh initiative to strengthen methods of expenditure
control.
THEMES OF THE ‘NEW FISCAL POLICY’

43. STOCK MARKET

44. Introduction:
• A company form of organisation is a business entity
which is established under provision of India`s
Companies Act 1956, through promotion,
incorporation and floatation.

45. WHAT IS A
STOCK MARKET?
 A stock market or equity market is a public entity for
the trading of company stock (shares)
and derivatives at an agreed price.
 These are securities listed on a stock exchanges as well
as those only traded privately.
 The stocks are listed and traded on stock exchanges
which are entities of a corporation or mutual
organization. The largest stock market in the USA, by
market capitalization, is the NYSE.

46. Importance of Stock Market:
• Function and purpose:
The stock market is one of the most important sources
for companies to raise money. This allows businesses to
be publicly traded, or raise additional capital for
expansion by selling shares of ownership of the
company in a public market.

47.  History has shown that the price of shares and other
assets is an important part of the dynamics of economic
activity, and can influence or be an indicator of social
mood.
 An economy where the stock market is on the rise is
considered to be an up-and-coming economy.

48. WHAT ARE STOCKS?
At some point, just about every company
needs to raise money
In each case, they have two choices:
Borrow the money, or
Raise it from investors by selling them a stake
(issuing shares of stock) in the company

49. When you own a share of stock, you are a
part owner in the company with a claim
(however small it may be) on every asset and
every penny in earnings.
Individual stock buyers rarely think like
owners, and it's not as if they actually have a
say in how things are done. Nevertheless, it's
that ownership structure that gives a stock
its value

50. WHAT IS A STOCK EXCHANGE ?
• A market in which securities are bought and sold: "the
company was floated on the Stock Exchange".
• The initial offering of stocks and bonds to investors is
by definition done in the primary market and
subsequent trading is done in the secondary market.
• A stock exchange is often the most important
component of a stock market.
• Supply and demand in stock markets are driven by
various factors that, as in all free markets, affect the
price of stocks.

51. ROLE OF STOCK EXCHANGE
• Raising capital for business:- common forms of raising capital-
• Mobilizing savings for investments.
• Creating investment opportunities for small companies.
• Government capital rising for development projects.
• Facilitates company growth.
Going to
public
Limited
partnership
Venture
capital
Corporate
companies

52. HISTORY OF STOCK EXCHANGE
The stock exchange was established by “East India
company” in 18th century . In India it was established
in 1850 with 22 stock brokers opposite to town hall
Bombay .This stock exchange is known as oldest stock
exchange of Asia.

53. Initial members who are still running their
business in stock exchange are
D.S.Prabhudas &company
Jamnadas Morarjee
Champak lal Devidas
Brymohan Laxminarayan

54. BROKER AND JOBBER
BROKER: He is one acts as a intermidiary on
behalf of others. A broker in a stock exchange ,is
a commission agent who transacts business in
securities on behalf of non members.
JOBBER: He is not allowed to deal with the
public directly .He deals with brokers who are
engaged with the investors . Thus, the securities
is bought by the jobber from members and sells
to members who are operating on the stock
exchange as broker.

55. DIFFERENCESBETWEEN A JOBBER AND A BROKER
JOBBER
 A jobber is an independent
dealer in securities, purchasing
or selling securities on his own
account
 A jobber deals only with the
brokers ,does not deal with the
general public
 A jobber earns profit from his
operations i.e., buying and
selling activities
 Each jobber specializes in certain
group of securities
BROKER
 A broker deals with the jobber
on behalf of his clients. in other
words, a broker is a middleman
between a jobber and clients
 A broker is merely an agent,
buying or selling securities on
behalf of his clients
 A broker gets only commission
for his dealings
 The broker deals in all types of
securities

56. SPECULATION AND SPECULATOR
 SPECULATION : It is the transaction of members to
buy or sell securities on stock exchange with a view to
make profits to anticipated rise or fall in price of securities.
 SPECULATOR : The dealer in stock exchange who
indulge in speculation are called speculator . They do not
take delivery of securities purchased or sold by them , but
only pay or rescue the difference between the purchase
price and sale price . The different types of speculators are
BULL
BEAR
STAG
LAME DUCK

57. BULL {TEJIWALA}
He is speculator who expects the future raise in price of
securities he buys the securities to sell them at future date
at the higher price.
He is called as bull because his activities resembles as a bull ,
as the bull tends to throw its victims up in the air through its
horns. In simple the bull speculator tries to raise the price of
securities by placing a big purchase orders.

58. BEAR {MANDIWALA}
He is speculator who
expects future fall in prices,
he does an agreement to
sell securities at future
date at the present market
rate .
He is called as bear because
his altitude resembles with
bear , as the bear tends to
stamp its victims down to
earth through its paws . In
simple the bear speculator
forces of prices of
securities to fall through
his activities.

59. STAG {DEER}
He operates in new issue
of market . He is just like a
bull speculator . He applies
large number of shares in
the issue market only by
paying, application money,
allotment money. He is not
a genuine investor because
, he sells the alloted
securities at the premium
and makes profit. In simple
he is cautious in his
dealings . He creates an
artificial rise in prices of
new shares and makes
profits.

60. LAME DUCK
He is speculator when the
bear operator finds it
difficult to deliver the
securities to the consumer
on a particular day as
agreed upon , he struggles
as a lame duck in fullfilling
his commitment . This
happens when the prices
do not fall as expected by
the bear and the other
party is not willing to
postpone the settlement to
the next period.

61. MAJOR STOCK EXCHANGES
ECONOMY STOCK EXCHANGE
US & EUROPE NYSE
US & EUROPE (NORTH) NASDAQ
JAPAN TOKYO STOCK EXCHANGE
UNITED KINGDOM LONDON STOCK EXCHANGE
EUROPE EURONEXT
CHINA SHANGHAI STOCK EXCHANGE
HONG KONG HONGKONG STOCK EXCHANGE
CANADA TORONTO STOCK EXCHANGE
BRAZIL BM&F BOVESPA

62. ECONOMY STOCK EXCHANGE
AUSTRALIA AUSTRALIAN SECURITIES EXCHANGE
GERMANY DEUTSCHE BORSE
SWITZERLAND SIX SWISS EXCHANGE
CHINA SHENZHEN STOCK EXCHANGE
SPAIN BME SPANISH EXCHANGES
INDIA BOMBAY STOCK EXCHANGE
SOUTH KOREA KOREA EXCHANGE
INDIA NATIONAL STOCK EXCHNGE
RUSSIA MICEX – RTS
SOUTH AFRICA JSE LIMITED

63. SOME INDIAN STOCK EXCHANGES
EXCHANGE
BOMBAY STOCK EXCHANGE
NATIONAL STOCK EXCHANGE
JAIPUR STOCK EXCHANGE
UP STOCK EXCHANGE ASSOCIATION
MADRAS STOCK EXCHANGE
COCHIN STOCK EXCHANGE
BANGLORE STOCK EXCHANGE
GAUHATI STOCK EXCHANGE
LUDHIANA STOCK EXCHANGE
CALCUTTA STOCK EXCHANGE
LOCATION
MUMBAI
MUMBAI
JAIPUR
KANPUR
CHENNAI
COCHIN
BENGULURU
GAUHATHI
LUDHIANA
KOLKATA
NSE AND BSE ARE THE MAJOR STOCK EXCHANGES IN INDIA.

64. BOMBAY STOCK EXCHANGE
BSE Limited formerly known as Bombay Stock
Exchange (BSE) , is the oldest stock exchange in
Asia.
It is a stock exchange located on Dalal Street,
Mumbai.
It the 6th largest stock exchange in Asia and the
14th largest in the world.

65. The BSE has the largest number of listed
companies in the world.
The BSE SENSEX, also called "BSE 30", is a
widely used market index in India and
Asia.
Though many other exchanges exist, BSE
and the National Stock Exchange of India
account for the majority of the equity
trading in India.
While both have similar total market
capitalization (about USD 1.6 trillion),
share volume in NSE is typically two times
that of BSE.

66. BSE BUILDING; BSE
DISPLAYS SENSEX ;
PEOPLE TRADING AT
THE BOMBAY STOCK
EXCHANGE

67.  The NSE is the virtual exchange where you can only trade online.

68. Stock trading
Stock trading is not just buying and selling stocks
at the stock market, there are so many other
factors that need to be taken care of for
successful stock trading.
Anyone who invests in the stock market wishes to
make profit from the investments. To ensure that
you get significant return from your investment
you have to pick up the right stocks at the right
time.
If you have decided to trade in stocks the first
thing that you need to decide is the stock
market where you will trade.

69. BSE NSE
Number of listed
companies
5,749 (as of Sep 2015) 1,696 (as of Sept 2015)
Market capitalization of
listed companies
US$ 1.7 trillion (23 Jan 2015) US$ 1.65 trillion (23 Jan 2015)
Main Index
BSE Sensex S&P CNX Nifty
Index value
25963 (as of Sep 2015) 7,899.15 (as of Sep 2015)
Location
Mumbai, India Mumbai, India
Claim to fame
Oldest stock exchange in Asia.
Largest stock exchange in
India in terms of daily
turnover and number of
trades.
Website www.bseindia.com www.nseindia.com
Established in 1875 1992

72. General Market Advice:
1. Never chase a stock.
2. Buy when markets are in the grip of panic.
3. Only buy fundamentally strong stocks, which
are undervalued.
4. Buy stocks grown in top line and bottom line
over the past years.
5. Invest in companies with proven management.
6. Avoid loss-making companies.
7. PE Ratio and Growth in earnings per share are
the key.

73. 8. Look for the dividend paying record.
9. Invest in stocks for sure returns.
10. Stocks have been the high yielding asset
class over the past.
11. The basic property of any asset class is to
grow.
12. Buy when everyone is selling and sell
when everyone buys.
13. Invest a fixed amount each month.

74. National Income in India,
Concept and Measurement

75. Meaning of National Income
• National income is the money value of all the final goods
and services produced by a country during a period of one
year. National income consists of a collection of different
types of goods and services of different types.
• Since these goods are measured in different physical units it
is not possible to add them together. Thus we cannot state
national income is so many millions of meters of cloth.
Therefore, there is no way except to reduce them to a
common measure. This common measure is money.
• If the value of a meter of cloth is Rs. 20 and the total cloth
produced is 100 meters, then the money value of cloth is Rs.
2000. In this way we can find out the value of other goods
and services and the total value of all the goods and
services produced during one year.

76. Basic Concepts in National income
• Gross domestic product
• Gross domestic product at constant
price and at current price
• Gross domestic product at factor
cost and Gross domestic product at
market price

77. Basic Concepts in National income
•Net domestic product
•Gross national product
•Net national Product
•Net national product at factor
cost or national income

78. Gross Domestic Product
• Gross domestic product is
the money value of all final
goods and services
produced in the domestic
territory of a country during
an accounting year.

79. Gross Domestic Product
•Domestic territory Means
a. Territory lying within the political
frontiers, including territorial waters of
the country.
b. Ships and aircrafts operated by the
residents of the country between two or
more countries.

80. Gross Domestic Product
c.