Monetary and fiscal policies are the two main tools used by the government and central bank to maintain economic stability, control inflation, reduce unemployment, and promote growth. This unit focuses on how these policies are applied in India, their instruments, and their recent trends.
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What is Monetary Policy?
Monetary policy is managed by the Reserve Bank of India (RBI) to control the money supply, interest rates, and inflation in the country. The key objective is to maintain price stability, support economic growth, and ensure financial stability.
Instruments of Monetary Policy:
CRR (Cash Reserve Ratio): The percentage of a bank’s total deposits that must be kept with the RBI in cash. A higher CRR reduces liquidity in the economy.
SLR (Statutory Liquidity Ratio): The percentage of deposits banks must maintain in the form of gold, cash, or government-approved securities. It ensures the bank’s solvency and controls inflation.
Repo Rate: The rate at which RBI lends money to commercial banks. A higher repo rate makes borrowing costlier, reducing inflation.
Reverse Repo Rate: The rate at which the RBI borrows from banks. Increasing it encourages banks to park more funds with RBI, reducing money flow in the economy.
These tools are adjusted regularly by RBI based on inflation levels, growth prospects, and global economic conditions.
What is Fiscal Policy?
Fiscal policy is the government’s strategy to influence the economy by adjusting spending and taxation. It’s designed to promote growth, reduce inequality, and maintain economic stability.
Goals of Fiscal Policy:
Mobilize resources for development
Control inflation and unemployment
Promote economic equality
Support infrastructure development and welfare programs
Tools of Fiscal Policy:
Taxation: Increasing or decreasing taxes to regulate spending and investment.
Public Expenditure: Government spending on projects, salaries, and subsidies that stimulate demand.
Deficit Financing: When expenditure exceeds revenue, the government borrows to bridge the gap, aiming to boost economic activity.
Recent Trends in India’s Macroeconomic Policies
In recent years, both fiscal and monetary policies in India have been aimed at reviving growth after COVID-19, tackling inflation, and promoting self-reliance (Atmanirbhar Bharat). Some notable developments include:
Reduction in repo rates during the pandemic to make borrowing easier.
Increased government spending on infrastructure, health, and welfare.
Emphasis on targeted subsidies and direct benefit transfers (DBT).
Gradual tightening of monetary policy in response to rising inflation globally.
India’s macroeconomic policy now focuses on balancing growth with inflation control, ensuring long-term fiscal sustainability.
Conclusion
Monetary and fiscal policies work together to steer the Indian economy in the right direction. While the RBI controls liquidity and inflation through monetary tools, the government uses fiscal tools to boost development and welfare. A sound understanding of these policies is essential to grasp how India navigates economic challenges and opportunities.