UPSC Prelims 2015 Q86: Indian Economy – Monetary Policy & Money Supply
With reference to Indian economy, consider the following:
1. Bank rate
2. Open market operations
3. Public debt
4. Public revenue
Which of the above is/are component/components of Monetary Policy?
- (a) 1 only
- (b) 2, 3 and 4
- (c) 1 and 2
- (d) 1, 3 and 4
Answer: (c) 1 and 2
Explanation
Components of Monetary Policy
Monetary policy is the RBI's control of money supply and interest rates.
Fiscal policy is the Government's use of taxes, spending and borrowing.
| Item | Component of Monetary Policy? | Belongs to |
|---|---|---|
| 1. Bank rate | Yes | Monetary policy |
| 2. Open market operations | Yes | Monetary policy |
| 3. Public debt | No | Fiscal policy |
| 4. Public revenue | No | Fiscal policy |
Tools of monetary policy:
| Type | Tools |
|---|---|
| Quantitative | Repo rate, reverse repo, bank rate, CRR, SLR, open market operations |
| Qualitative | Margin requirements, credit rationing, moral suasion |
Since 2016, the Monetary Policy Committee fixes the repo rate.
Answer: (c) 1 and 2.
Why each option is right or wrong
- (a) Incorrect. Open market operations are also a monetary policy tool.
- (b) Incorrect. Public debt and public revenue belong to fiscal policy.
- (c) CORRECT. Bank rate and open market operations are components of Monetary Policy.
- (d) Incorrect. Public debt and public revenue are fiscal, not monetary.
Key point
Monetary policy (RBI): repo, bank rate, CRR, SLR, open market operations. Fiscal policy (Government): taxes, spending, public debt.
Remember
Monetary = bank rate, repo, CRR, SLR, OMO.
Common mistakes
- Mixing fiscal tools into monetary policy.
- Thinking the RBI's management of public debt makes it a monetary tool.
- Forgetting that open market operations mean buying and selling Government securities.
Exam tip
'Public' items (debt, revenue, expenditure) are fiscal. Rates and ratios are monetary.
Sources
- Reserve Bank of India — Monetary Policy: instruments
- NCERT Class XII — Introductory Macroeconomics, Ch 3 (Money and Banking)