Monetary and Fiscal Policy Difference and dependence

Distinguish between Monetary and Fiscal Policy. To what extent is monetary policy independent of fiscal policy in India

Monetary Policy
Who makes it? Ans.RBI. What is their intention? Ans.To control the money supply in the banking system and thus control the inflation. What tools do they use? Repo,reverse repo, bank rate, SLR etc. What happens? Suppose there is too much inflation (price rise) in the market because people have more ca$h in hand and only few products in market. So RBI changes those numbers in a way that banks have less money to give as loans to people. Obviously the banks will charge higher interest rates on their loans, this is called tightening of the moneytary policy / Dear money policy. Reverse of it, is Cheap money policy i.e. when RBI feels that people should get loans @cheap rate so that there is boost in demand.

Fiscal Policy
Who makes it?=Government. What tools do they use? 1. Taxation 2. Public Expenditure. What is their intention? Re-distribution of income,allround Development. e.g. Government puts 30% corporate tax (taxation), then uses that money to fund NREGA [100 days wage to poors] (public Expenditure). So part of rich peoples income gets redistributed to poor -people.

To what extent is monetary policy independent of fiscal policy in India

As we saw Monetary= RBI, fiscal =Government. Many times, Government doesnt have enough money to fund its projects*. So they release bonds. RBI sells those bonds on Governments behalf to the banks. Now banks may or may not

be interested in purchasing them. So, RBI has a tool called SLR* (Statutary liquidity ratio), which means banks have to compulsory keep x amount of their money in form of Government bonds even if they like it or not. * See? Government project= fiscal policys public Expenditure tool SLR=Monetary policys tool (by RBI) Thus, SLR (part of monetary policy) is not totally independent from fiscal policy. There is conflict of interest: RBIs role as money supply controller vs RBIs role as Governments debt manager. Same way, Government wants that farmers should get loans @cheaper rate. So, RBI makes special consessions to regional rural banks in CRR/Repo etc.