1. Fiscal & Monetary Policy
Fiscal Policy: refers to expenditure (used to provide goods and services), taxation (to
finance the various government expenses) and government borrowing. The main point
of fiscal policy is to keep the surplus or deficit swings in the economy to a minimum
by reducing inflation and recession.
There are two types of expenditures – money spent on the delivery of goods and
services and the transfer of funds to other levels of government. Government
expenditure can be both, planned, as well as non-planned. Planned capital expenditure
is like government expenditure on social sectors and planned non-capital expenditure
means normal government expenses. The latter means sudden expenses on, say,
durable disaster management and mounts to government expenses on government
officials,includingVIPs.
Taxation takes many forms (direct and indirect), including taxation of personal and
corporateincome, so-called value added taxation and the collection ofroyalties ortaxes
on specific sets of goods. Government revenue is categorised into revenue receipts –
like tax revenue and non-tax revenue – and capital receipts (say, through borrowing).
Through borrowing, a government means to provide a great deal of goods and services
to its people, while not having the immediate tax revenue to fund that expenditure. This
is done primarily by issuing securities, such as Treasury Bills or Treasury Bonds. All
levels of government borrow money at some point or the other. Fiscal Policy has two
main tools – the changing of tax rates, and changing of government expenditure. The
government has been focusing on both of these to provide a boost to the economy.
MonetaryPolicy :
The Monetary and Credit Policy is the policy statement, traditionally announced twice
a year, through which the Reserve Bank of India seeks to ensure price stability for the
economy.
These factors include - money supply, interest rates and the inflation. In banking and
economic terms money supply is referred to as M3 - which indicates the level (stock)
of legal currency in the economy.
Besides, the RBI also announces norms for the banking and financial sector and the
institutions which are governed byit. Thesewould bebanks, financial institutions, non-
banking financial institutions, and primary dealers (money markets) and and dealers
in the foreign exchange (forex) market./When is Monetary Policy
AnnouncedHistorically, the Monetary Policy is 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

2. year.Initially, the Reserve Bank of India announced all its monetary measures twice a
year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in
nature as RBI reserves its right to alter it from time to time, depending on the state of
the economy.Difference between Fiscal And Monetary PolicyFiscal PolicyMonetary
Policy1) Fiscal policy is a deliberate change in government revenue and expenditure
to influence the level of national output and prices.1) Monetary Policy deals with the
supply of money , costand availability of credit.2) Fiscal Policy is the broader tool of
the government.2)RBI is responsible for formulating and implementing monetary
policy3) The annual budget showcases the government fiscal policy3) RBI announces
monetary policy twice a year4) Instruments of fiscal policy are government
expenditure and taxes.4) Instruments of monetary policy - Bank Rate , CRR , SLR ,
repo rate , reverse repo rateInstruments of Monetary PolicyBank RateBank rate is the
minimum rate at which the central bank provides loans to the commercial banks. It is
also called the discount rate.Usually, an increase in bank rate results in commercial
banks increasing their lending rates. Changes in bank rate affect credit creation by
banks through altering the cost of credit.Cash Reserve Ratio and Statutory Liquidity
RatioCRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks
have to keep/maintain with the RBI. This serves two purposes. Itensures that a portion
of bank deposits is totally risk-free and secondly it enables that RBI control liquidity
in the system, and thereby, inflation.Besides the CRR, banks are required to invest a
portion of their deposits in government securities as a part of their statutory liquidity
ratio (SLR) requirements.The government securities (also known as gilt-edged
securities or gilts) are bonds issued by the Central government to meet its revenue
requirements. Although the bonds are long-term in nature, they are liquid as they can
be traded in the secondarymarket.Open Market OperationsAn important instrument of
credit control, the Reserve Bank of India purchases and sells securities in open market
operations.In times of inflation, RBI sells securities to mop up the excess money in the
market. Similarly, to increase the supplyof money, RBIpurchases securities.Repo Rate
and Reverse Repo RateA repo or repurchase Agreement is an instrument of money
market. Usually reserve bank (federal bank in U.S) and commercial banks involve in
repo transactions but not restricted to these two. Individuals, banks, financial institutes
can also participate in repurchase agreement.Repo is a collateralized lending i.e. the
banks which borrow money from Reserve Bank to meet short term needs have to sell
securities, usually bonds to Reserve Bank with an agreement to repurchase the same at
a predetermined rate and date. In this way for the lender of the cash (usually Reserve
Bank) the securities sold by the borrower are the collateral against default risk and for
the borrower of cash (usually commercial banks) cash received from the lender is the
collateral.Reserve bank charges some interest rate on the cash borrowed bybanks. This
rate is usually less than the interest rate on bonds as the borrowing is collateral. This
interest rate is called ‘repo rate’. The lender of securities is said to be doing repo
whereas the lender of cash is said to be doing ‘reverse repo’.Ina reverse repo Reserve
Bank borrows money from banks by lending securities.
The interest paid by Reserve Bank in this case is called reverse repo rate.Borrower of
funds is called as seller of repo and lender of funds is called as buyer of repo. When
the term of the loan is for one day it is known as an overnight repo and if it is for more

3. than one day it is called a term repo.The stockmarkets and money move similarly, in
some ways. Why?Most people attribute the link between the amount of money in the
economy and movements in stock markets to the amount of liquidity in the system.
This is not entirely true.The factor connecting money and stocks is interest rates.
People save to get returns on their savings. In true market conditions, this made bank
deposits orbonds (whosereturns are linked to interest rates) and stocks (whosereturns
are linked to capital gains), competitors for people's savings.A hike in interest rates
would tend to suck money out of shares into bonds or deposits; a fall would have the
opposite effect. This argument has survived econometric tests and practical
experience.How does the Monetary Policy affect the domestic industry and exporters
in particular?Exporters look forward to the monetary policy since the central bank
always makes an announcement on export refinance, or the rate at which the RBI will
lend to banks which have advanced pre-shipment credit to exporters.A lowering of
these rates would mean lower borrowing costs for the exporter.