Fiscal and Monetary Policy in India

Fiscal and Monetary Policy for RAS Mains: Fiscal policy and monetary policy are the two tools used by the state to achieve its macroeconomic objectives. Main objective of fiscal policy is to increase the aggregate output of the economy. Fiscal policy is the collective term for the taxing and spending actions of governments. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the Reserve Bank of India (RBI).
Fiscal policy:
  • Fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. 
  • Fiscal policy is more concerned with government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. 
  • According to Keynesian economics, when the government changes the levels of taxation and governments spending, it influences aggregate demand and the level of economic activity. 
  • Fiscal policy can be used to stabilize the economy over the course of the business cycle.
Monetary policy
  • 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 its control over interest rates in order to maintain price stability and achieve high economic growth.
  • Monetary operations involve monetary techniques which operate on monetary magnitudes such as money supply, interest rates and availability of credit aimed to maintain Price Stability, Stable exchange rate, Healthy Balance of Payment, Financial stability, Economic growth. 
  • In India, the central monetary authority is the Reserve Bank of India (RBI). It is so designed as to maintain the price stability in the economy. 
  • Objectives of the monetary policy of India, as stated by RBI, are: Price Stability, Controlled Expansion Of Bank Credit, Promotion of Fixed Investment, Restriction of Inventories and stocks, To Promote Efficiency, Reducing the Rigidity. 
  • RBI Review Monetary Policy of India once in every 2 Month, so there are Six Bi-monthly Monetary Policy review in each financial year. 
Sixth Bi-monthly Monetary Policy 2015-16 by RBI on 2nd February 2016: On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 per cent;
  • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL);
  • continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
  • continue with daily variable rate repos and reverse repos to smooth liquidity.
  • Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.  
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