![]() Personal Website of R.Kannan |
Home | Table of Contents | Feedback |
Title Page |
Module - 1
Monetary & Credit Policy Announcements by RBI The Reserve Bank of India announced its biannual Monetary and Credit Policy for the first half of the financial year 2004-05 on Tuesday, May 18. The text of the policy statement consisted of three parts, as under-
The objectives and ambit of the Policy Statement are well brought out in the initial paragraph, which is quoted as under:
After releasing the annual policy statement on May 18, 2004, The Governor RBI on 26th October, 2004 announced "Mid-term Review of Annual Policy for the year 2004-05". While presenting the Policy Review statement the Governor again reiterated as under:-
The Policy Review statement also consisted of three parts, as under:-
Rationale of Monetary & Credit Policy Announcement by RBI The Monetary and Credit Policy statement, traditionally announced by RBI twice a year, through which the Central Bank seeks to ensure price stability for the economy and easy access to credit supply for all productive sectors of the economy. The scope of the Policy Statement includes information on- money supply, interest rates and inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy. This term is explained further in the next article under "definitions". The second part of the Policy statement covers norms for the banking and financial sector viz. banks, financial institutions, non-banking financial institutions, and primary dealers (money markets) and dealers in the foreign exchange (forex) market. Differentiation Between Monetary & Fiscal Policies Monetary and Fiscal Policies announced respectively by the RBI and the Government of India are the two important pillars of regulatory/correctional measures intended to influence/shape macroeconomic changes in the countries economy. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy to sustain productive ventures. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy further aims, as already stated, to maintain price stability, full employment and economic growth. The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements to carry out this objective. The Monetary Policy is, however, different from Fiscal Policy as the former brings about a change in the economy by altering money supply and interest rate, whereas fiscal policy is a broader tool with the Central Government. The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. By way of an example, at the time of recession the government can increase expenditures or cut taxes in order to generate demand. On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes. The annual Union Budget showcases the government's Fiscal Policy. Historically, the Monetary Policy was being announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year. Since 1998-99 RBI has moved in for just one policy in April-end followed by a mid-year a review of the policy carried out later in the year during October. The Monetary Policy has over the years become dynamic in nature due to diverse features like opening of the economy, liberalisation and gloablisation process etc. The RBI, therefore, reserves its right to alter it from time to time, depending on the state of the economy. | |||||
|