Monetary and Fiscal Policy
Monetary policy and Fiscal policy are the two main tools used to manage a country's economy. Monetary policy is managed by the central bank, which is the Reserve Bank of India (RBI). Its main goal is to control the supply of money and interest rates. By doing this, the RBI keeps prices stable and helps the economy grow. When prices rise too fast, it is called inflation. To stop inflation, the RBI usually increases interest rates. This makes borrowing money expensive for people and businesses.
Concepts (3)
Fiscal Deficit is a measure of how much the government needs to borrow from the market. It is calculated as the difference between the government's total spending and its total income from taxes and other sources (excluding new loans).
Fiscal Deficit is a measure of how much the government needs to borrow from the market. It is calculated as the difference between the government's total spending and its total income from taxes and other sources (excluding new loans). A high fiscal deficit can lead to inflation and increase the national debt. Example: If the government earns ₹100 but spends ₹135 on welfare schemes and infrastructure, the Fiscal Deficit is ₹35.
Open Market Operations refer to the buying and selling of government bonds in the open market by the RBI. When the RBI wants to increase the money supply, it buys bonds from banks and gives them cash.
Open Market Operations refer to the buying and selling of government bonds in the open market by the RBI. When the RBI wants to increase the money supply, it buys bonds from banks and gives them cash. When it wants to decrease the money supply to fight inflation, it sells bonds to banks and takes their cash. This is a direct way to manage the 'liquidity' or cash availability in the banking system.
Repo Rate stands for 'Repurchasing Option Rate.' It is the interest rate at which the RBI lends money to commercial banks when they face a shortage of funds. If the RBI increases the Repo Rate, banks find it expensive to borrow.
Repo Rate stands for 'Repurchasing Option Rate.' It is the interest rate at which the RBI lends money to commercial banks when they face a shortage of funds. If the RBI increases the Repo Rate, banks find it expensive to borrow. Consequently, banks increase the interest rates for their customers' home or car loans. This reduces the amount of money circulating in the market. Example: In 2022, the RBI raised the Repo Rate to control high inflation caused by global supply chain issues.
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