In India, Monetary policy is the tool by which the Central bank (RBI) controls: (i) the supply of money, (ii) availability of money and (iii) cost of money or rate of interest, in order to attain objectives oriented towards growth and stability. RBI makes monetary policy statements on a bi-monthly basis. Two types: Expansionary policy — increases total money supply (used to combat unemployment in recession, by lowering interest rates) and Contractionary policy — decreases money supply (used to combat inflation, by raising interest rates). Fiscal Policy is the government’s policy on government spending and tax policies to influence macroeconomic conditions like aggregate demand, inflation and employment. First proposed by J. M. Keynes.

RBI introduced MCLR in April 2016, replacing the Base Rate system (which itself replaced BPLR from July 1, 2010). MCLR is the internal benchmark lending rate for banks. Components: Marginal cost of funds + Negative carry on CRR + Operating costs + Tenor premium. Banks publish overnight MCLR, 1-month, 3-month, 6-month and 1-year MCLR. Since MCLR proved ineffective for monetary transmission, RBI recommended banks switch to External Benchmark Linked Lending Rate (EBLR) from October 1, 2019. Under EBLR, floating rate retail loans (housing, vehicle, MSE) are benchmarked to: RBI policy repo rate, or GoI 3-month Treasury Bill yield, or GoI 6-month Treasury Bill yield (published by FBIL).

Introduced in March 2004 after FIIs brought large capital inflows (dollars) causing rupee liquidity surplus. RBI buys dollars → creates rupees → excess liquidity. MSS addresses liquidity of more enduring nature through sterilisation, differentiated from day-to-day liquidity management. Government issues Treasury Bills and/or dated securities under MSS — additional to normal borrowing — to absorb excess liquidity. Used only in grave scenarios (excess liquidity causing inflation). Also used post-demonetisation in 2016 to withdraw excess liquidity created when deposits flooded the banking system.

Fiscal policy is described as changes in government expenditures and taxes aimed at achieving macroeconomic policy objectives such as growth, employment, investment, etc. Fisher defines it as “the government’s policy on the level of government purchases, the level of transfers, and the tax system.” J. M. Keynes was the first economist to propose a theory linking fiscal policy and economic performance. Two fundamental instruments: Taxation (affects disposable income, savings, investment, prices) and Government expenditure (purchases of goods/services, transfer payments to poor/unemployed/elderly). Primary objectives: Promoting economic growth + Maintaining price stability. Additional: Mobilising resources, allocative efficiency, reducing inequality, promoting private investment.

FRBM Act enacted by Parliament in 2003, brought into effect on July 5, 2004. Context: India’s fiscal deficit was rising persistently in late 1980s–early 1990s. Four main objectives: (1) Achieve long-term macro-economic stability while generating budget surpluses; (2) Introduce prudential debt management; (3) Introduce transparent fiscal management; (4) Remove fiscal impediments. Four requirements: (i) Place three statements before Parliament each year (Medium Term Fiscal Policy, Fiscal Policy Strategy, Macroeconomic Framework); (ii) Reduce fiscal deficit (Rules prescribe 3% of GDP) and eliminate revenue deficit by March 31, 2008; (iii) Prohibit Centre from borrowing from RBI (ban on deficit financing); (iv) Finance Minister reports quarterly to Parliament on implementation. Main theme: Reduce dependence of Government on borrowings and reduce fiscal deficit in phased manner.