What is monetary policy?
Monetary policy is the Reserve Bank of India’s use of the policy rate and the banks’ reserve ratios to influence how much money is available and what it costs to borrow. It is not the income-tax rate. The tax rate is set by Parliament.
Which instruments does the Reserve Bank use?
The repo rate is the rate at which the Reserve Bank lends short-term funds to banks. The reverse repo rate is the rate at which it absorbs funds from them. The cash reserve ratio is the share of deposits a bank keeps with the Reserve Bank. The statutory liquidity ratio is the share a bank keeps in cash, gold, or approved securities. Open-market operations are the Bank’s purchase or sale of government securities. This page does not state the percentage in force today. The Bank changes those settings. A company reads the current figure from the Bank, not from a note of an earlier year.
What is fiscal policy?
Fiscal policy is the government’s use of tax and public spending. It is decided in the Union Budget and written into law. A lower tax or a higher public spend is an expansionary setting. A higher tax or a lower spend is a contractionary setting. Transfer payments, such as a subsidy paid to a household, change household income in the same family of tools. The Reserve Bank does not pass the Finance Act. The government does not set the repo rate.
What does either policy change for a company?
A change in the policy rate changes the cost of a bank loan. It does not, by itself, change the company’s income-tax return. A change in the tax statute changes what the company pays, and the return is filed under that statute. The current company rates and the return are on the tax page and the income-tax return page. A company does not file a form called monetary policy or fiscal policy.
What is a supply-side measure?
A supply-side measure aims at how much the economy can produce, rather than at the policy rate. Training, a change in a direct tax, and a sale of a public undertaking are examples of that kind of measure. They are not a third filing on the Ministry of Corporate Affairs portal. They sit with the Budget or with the statute that enacts them.
Frequently asked questions
Four questions cover income tax, a filing, today’s reserve ratio, and a tax cut.
Does the Reserve Bank set the income-tax rate?
No. Income tax is fiscal policy. Parliament sets it in the Income-tax Act. The Reserve Bank sets the policy rate and the reserve ratios.
Is the repo rate a company filing?
No. A company does not file a monetary-policy form. The rate changes what a bank charges for credit. It is not an annual return.
Does this page state today’s cash reserve ratio?
No. The Reserve Bank changes the ratio. A percentage printed on an old note is not the ratio in force.
Is a tax cut monetary policy?
No. A tax cut is fiscal policy. It is announced in the Budget and enacted in the tax law. Open-market purchases and a change in the policy rate are monetary policy.
Sources
Monetary policy is made by the Reserve Bank of India. Fiscal policy is the government’s tax and spending, set through the Union Budget and the tax statutes.