Two arms of macroeconomic management: fiscal policy is the government's use of taxation, spending, and borrowing to influence the economy, while monetary policy is the central bank's use of interest rates and the money supply to manage inflation and growth.
- Fiscal policy is set by the government (Ministry of Finance) through the Union Budget; its tools are tax rates, public spending, subsidies, and the deficit; see concept fiscal deficit.
- Monetary policy is set by the Reserve Bank of India through the Monetary Policy Committee; its tools are the concept repo rate, the CRR and SLR, and open-market operations.
- Expansionary fiscal policy (more spending or lower taxes) and expansionary monetary policy (lower rates) both stimulate demand; contractionary versions cool the economy.
- The two must be coordinated; for example loose fiscal and tight monetary policy can work against each other.
- Monetary policy in India follows a flexible inflation-targeting framework; see concept monetary policy.
The who-controls-what split (government versus RBI), the tools of each, and the expansionary-versus-contractionary distinction are core economy facts often tested in matching form.
Fiscal policy is the government's tax-and-spend tool; monetary policy is the RBI's interest-rate-and-money-supply tool; the repo rate is monetary, not fiscal.
Fiscal policy: government tax and spending (Budget); monetary policy: RBI interest rates and money supply; coordinate the two.