RBI Cuts Repo Rate by 25 Basis Points

1. What is Monetary Policy?

Definition: Monetary Policy is the policy through which a country’s central bank (RBI in India) controls money supply, interest rates, and credit in order to ensure economic stability, growth, and inflation control.

Objectives:

• Controlling inflation
• Ensuring economic growth
• Maintaining currency stability
• Reducing unemployment
• Managing credit and liquidity

2. What are Monetary Policy Tools?

Key Monetary Policy Tools include:

• Repo Rate
• Reverse Repo Rate
• CRR (Cash Reserve Ratio)
• SLR (Statutory Liquidity Ratio)
• Bank Rate

Repo Rate

🔹 Meaning:
The rate at which RBI lends short-term money to banks.

🔹 Mechanism:
Banks borrow from RBI by pledging securities.

🔹 Impact on Economy:

• ↑ Repo Rate → Loans costlier → Less money in market → ↓ Inflation
• ↓ Repo Rate → Cheaper loans → More money in market → ↑ Growth

🔹 Exam Tip:
Repo Rate is the most effective tool for controlling inflation.

Reverse Repo Rate

🔹 Meaning:
The rate at which banks deposit their surplus funds with the RBI and earn interest.

🔹 Impact on Economy:

• ↑ Reverse Repo → Banks park funds with RBI → Market liquidity ↓ → Inflation ↓
• ↓ Reverse Repo → Banks lend more → Liquidity ↑ → Growth ↑

CRR – Cash Reserve Ratio

🔹 Meaning:
Banks must keep a certain percentage of their total deposits as cash with the RBI.

🔹 Current Level: Around 4.5%

🔹 Impact on Economy:

• ↑ CRR → Less money for lending → ↓ Credit → ↓ Inflation
• ↓ CRR → More money to lend → ↑ Credit → ↑ Growth

🔹 Exam Tip: RBI gives no interest on CRR.

SLR – Statutory Liquidity Ratio

🔹 Meaning:
Banks must keep a certain portion of their deposits in the form of gold, government bonds, or approved securities.

🔹 Benefits:
Provides funding to the government and controls bank liquidity.

🔹 Impact on Economy:

• ↑ SLR → Less funds for loans → ↓ Liquidity
• ↓ SLR → ↑ Liquidity

Bank Rate

🔹 Meaning:
The rate at which RBI lends long-term funds to banks (no repo transaction involved).

🔹 Main Use:
An indicative rate that affects long-term policies.

🔹 UPSC Tip:
Changes in the Bank Rate affect penal interest rates.

🔁 Comparative Summary Table (for UPSC Revision):

Overall Effects on Indian Economy:

• Inflation control
• Influence on GDP growth
• Liquidity management in banking
• Affects consumer spending and investment

3. What is Fiscal Policy?

Meaning:
Fiscal Policy refers to the government’s strategy of managing revenue (taxes, borrowings) and expenditure to ensure economic stability, growth, and social justice.

In India:
It is controlled by the Central Government and implemented by the Ministry of Finance.

4. What are the Tools of Fiscal Policy?

🔸 1. Taxation Policy

• The government earns revenue through taxes.
• Two types:
  • Direct Taxes: e.g., Income Tax, Corporate Tax
  • Indirect Taxes: e.g., GST, Customs Duty, Excise Duty

🧠 UPSC Angle:
Tax adjustments can control demand/inflation.
E.g., Cutting GST → Boosts consumption → Increases demand

🔸 2. Government Expenditure

• Spending on infrastructure, education, healthcare, defense, etc.

Types:

• Revenue Expenditure
• Capital Expenditure

🧠 UPSC Angle:
During recession, increased government spending helps revive demand.

🔸 3. Fiscal Deficit & Borrowing

• When government’s expenditure > revenue = Fiscal Deficit

To cover the gap:

• Borrowing from the market
• Issuing bonds
• External loans

🧠 UPSC Tip:
A moderate fiscal deficit can boost growth if well-managed.

🔸 4. Subsidy Policy

• Government provides subsidies for food, fertilizer, LPG, etc., to help the poor.

🧠 Sometimes it increases the deficit, so targeted subsidies are preferred.

🔸 5. Disinvestment

• Government sells stakes in public sector enterprises.

Benefits:

• Raises capital
• Improves efficiency

🔸 6. Transfer Payments

• Direct transfers without receiving any service in return
  e.g., Pensions, PM-KISAN, DBT (Direct Benefit Transfers)

UPSC Perspective: Importance of Fiscal Policy

• Control of inflation
• Promotes economic development
• Generates employment
• Ensures social equality
• Maintains fiscal discipline

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