What is the Difference Between Monetary Policy and Fiscal Policy in India?

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oi-Sunil

By Sunil Fernandes

Published: Tuesday, October 28, 2014, 11:29 [IST]

Monetary policy and fiscal policy are two important terms that are often used by economists and analysts alike.

What is Monetary Policy in India?

Monetary Policy is the policy determined by the Reserve Bank of India with no intervention by the Government of India. In a Monetary Policy the RBI intervenes in a host of ways to control inflation monitor interest rates and control money supply in the economy.

For example, the central bank may intervene to hike interest rates and thereby control inflation in the economy. On the other hand if inflation is low, it may cut interest rates in the economy. The Central Bank may also broadly control money supply in the economy through a host of measures. It may also improve liquidity by cutting the cash reserve ratio for banks.

The Reserve Bank of India also conducts open market operations, wherein the central bank, buys and sells government bonds. All of the above mentioned policies and a lot more are together termed as monetary policy.

What is Fiscal Policy in India?

Fiscal Policies are largely determined by the government of India. This would include mesaures like tweaking with the direct and indirect tax collection to contril the fiscal deficit. When the government's deficit runs high it may add a slew of taxes to boost revenues. However, it has to be cautious as the same could also backfire.

Fiscal policy largely aims at stabilizing the economy, boosting revenues for the government and helping the economy grow. The government uses its tax levers to help the economy. Unlike the Monetary Policy where the Reserve Bank of India solely determines all of the policy, in the case of the fiscal policy the government of India decides on the same.

Both are different tools, but both aimed at helping the Indian economy.

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