Q. With reference to Indian economy, consider the following : - Bank rate
- Open market operations
- Public debt
- Public revenue
Which of the above is/are component/components of Monetary Policy? (UPSC Prelims 2015)
Answer:
1 and 2
Notes: The correct answer is
[C] 1 and 2. This question tests the fundamental distinction between
Monetary Policy (managed by the Central Bank/RBI) and
Fiscal Policy (managed by the Government).
- Bank Rate (Statement 1 – Correct): This is a quantitative tool of Monetary Policy. It is the rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial papers. Increasing the bank rate makes borrowing costlier, thereby reducing the money supply.
- Open Market Operations (Statement 2 – Correct): OMO involves the simultaneous purchase and sale of government securities (G-Secs) by the RBI in the open market to regulate the liquidity (money supply) in the economy.
- Public Debt (Statement 3 – Incorrect): This refers to the total liabilities of the government. Managing public debt is a core component of Fiscal Policy. While it affects the economy, it is an instrument used by the Ministry of Finance, not a direct tool of the RBI's monetary framework.
- Public Revenue (Statement 4 – Incorrect): This includes taxes, duties, and non-tax sources collected by the government to fund its expenditures. Like public debt, this is a pillar of Fiscal Policy.
Key Distinction:
- Monetary Policy: Focuses on controlling the money supply, interest rates, and inflation. Tools include Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR).
- Fiscal Policy: Focuses on government spending, taxation, and borrowing to influence the aggregate demand and economic growth.