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Q86 (IAS/2015) Economy › Money, Banking & Inflation › Monetary policy tools Official Key

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?

Result
Your answer: —  ·  Correct: C
Explanation

Monetary policy is a macro-economic policy tool used by RBI to influence the supply of money in the economy, using various instruments to control money supply or credit.[1]

**Bank Rate (Statement 1):** The Bank Rate is the rate at which RBI gives loans to commercial banks, and by increasing it, loans become more expensive, reducing reserves and decreasing money supply.[2] This is clearly a monetary policy tool.

**Open Market Operations (Statement 2):** Open Market Operations is an important tool by which RBI influences money supply, referring to buying and selling of bonds issued by the Government in the open market.[3] If inflation is high, RBI reduces money supply by selling government securities, and to increase money supply, it buys government securities from banks.[4]

**Public Debt and Public Revenue (Statements 3 & 4):** These are components of **fiscal policy**, not monetary policy. Fiscal policy deals with government revenue and expenditure, including taxation and public debt management, which are functions of the government, not the central bank.

Therefore, only Bank Rate and Open Market Operations are components of monetary policy.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
  2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 43
  3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
  4. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
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Q. With reference to Indian economy, consider the following : 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Which …
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10

This is the 'ABC' of Indian Economy. The question simply demands you distinguish between the RBI's toolkit (Monetary) and the Government's wallet (Fiscal). It is a direct lift from NCERT Macroeconomics; getting this wrong is a non-starter for Prelims.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
In the Indian economy, is the bank rate a component of monetary policy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 43
Presence: 5/5
“This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14- day, etc. This type of operations have now become the main tool of monetary policy of the Reserve Bank of India. The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.”
Why this source?
  • Explicitly defines the Bank Rate as the rate at which RBI gives loans to commercial banks.
  • States RBI can influence money supply by changing the Bank Rate, linking it to monetary control.
  • Explains how raising the Bank Rate makes bank loans expensive and reduces money supply — a standard monetary policy effect.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
Presence: 4/5
“It is a macro-economic policy tool used by RBI to influence the supply of money in the economy. As a part of Monetary Policy, the RBI uses various instruments to control the money supply or credit. Policy measures by RBI to increase money supply in the economy in order to promote economic growth are termed as Monetary Easing, and vice versa.”
Why this source?
  • States that RBI uses various instruments as part of monetary policy to control money supply/credit.
  • Places Bank Rate conceptually among the instruments RBI employs to influence the macro economy.
Statement 2
In the Indian economy, are open market operations a component of monetary policy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
Presence: 5/5
“Open Market Operations (OMO): Sale or purchase of government securities by RBI in the open market (secondary market) to banks/financial institutions for absorption and injection of durable liquidity in the economy is called open market operations. If the inflation in the economy is high then, to control the inflation RBI reduces the money supply by selling government securities. And if RBI wants to increase the money supply then it buys government securities from the banks/financial institutions and pays them money in exchange of government securities which ultimately increases the money supply in the economy. There are two types of Open Market Operations (OMOs). • Outright OMOs: They are permanent in nature.”
Why this source?
  • Explicitly lists Open Market Operations as a major instrument RBI uses for conducting monetary policy.
  • Describes OMOs as sale/purchase of government securities to absorb/inject durable liquidity, tying them to money-supply control and inflation management.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 3. Open Market Operations > p. 167
Presence: 5/5
“Open Market Operations (OMOs) refer to the buying and selling of G-Secs in the open market (i.e. in the public) by the RBI. The RBI, by selling G-Secs, reduces the money supply by withdrawing cash balances from within the economic controls, thereby controlling inflation.”
Why this source?
  • Defines OMOs as buying and selling of government securities by the RBI in the open market.
  • States that RBI uses OMOs to reduce money supply and control inflation, showing their role in monetary policy actions.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
Presence: 5/5
“Notice that in the previous case, Rs 100 in reserves could support deposits of Rs 400. But the banking system would now be able to loan Rs 300 only. It would have to call back some loans to meet the increased reserve requirements. Hence, money supply would fall. Another important tool by which the RBI also influences money supply is Open Market Operations. Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.”
Why this source?
  • Identifies OMOs as an important tool by which the RBI influences money supply.
  • Explains operationally that OMOs involve purchase/sale of government bonds, linking the mechanism to central bank policy.
Statement 3
In the Indian economy, is public debt a component of monetary policy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"**22 Fiscal Policy** ... 6. [Public Debt](/indian-economy/understanding-public-debt-causes-types-redemption)"
Why this source?
  • The webpage lists topics under separate headings for Monetary Policy and Fiscal Policy.
  • 'Public Debt' is explicitly listed under the Fiscal Policy section (item 6), not under Monetary Policy.
Web source
Presence: 5/5
"**21 Monetary Policy** ... **22 Fiscal Policy** 1. [Meaning and Instruments of Fiscal Policy] ... 6. [Public Debt]"
Why this source?
  • The document's table of contents separates 'Monetary Policy' (section 21) from 'Fiscal Policy' (section 22).
  • 'Public Debt' appears as an item under Fiscal Policy, indicating it is treated as a fiscal, not monetary, component.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 59
Strength: 5/5
“Monetary Policy is the process by which monetary authority (RBI) of a country controls the creation and supply of money in the economy. Over time, the objectives of monetary policy in India have evolved to include maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for”
Why relevant

Defines monetary policy as the process by which the RBI controls creation and supply of money, setting the core domain and objectives of monetary policy.

How to extend

A student can contrast this definition with the nature of public debt (government borrowing) to judge whether borrowing logically falls under money-supply control or a different policy area.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Components of Fiscal Policy > p. 83
Strength: 5/5
“The fiscal policy comprises the following three aspects: • 1. Government receipts, i.e. money received by the Government • 2. Government expenditure, i.e. money spent by the Government Public debt \overline{3} In the process of using fiscal policy, a country may either run into surplus or deficit or balanced budget. All the receipts and expenditure of the Government is credited to (goes into) and debited from (taken out from) the Consolidated Fund of India, Contingency Fund of India and Public Account of India. Consolidated Fund of India (CFI) - CFI is a Government of India's account which is similar to a normal bank account.”
Why relevant

Lists components of fiscal policy and explicitly places 'Public debt' in the fiscal policy context.

How to extend

Combine this with the monetary-policy definition to see that public debt is presented as fiscal (not monetary) in these sources, suggesting it is not a monetary-policy component.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > egin{array}{c|c|c|c|c} \\hline extbf{2015} & extbf{0} & extbf{0} \\[1ex] \ \hline \ \end{array} > p. 251
Strength: 3/5
“When the Reserve Bank of India reduced the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen? • (a) India's GDP growth rate increases drastically.• (b) Foreign Institutional Investors may bring more capital into our country.• (c) Scheduled Commercial Banks may cut their lending rates.• (d) It may drastically reduce the liquidity to the banking system.• 29. 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• (c) 1 and 2 2014 (b) 2, 3 and 4 30.”
Why relevant

Contains a multiple-choice/question format that includes 'Public Debt' among items to consider as components of monetary policy, indicating the question is debated or tested.

How to extend

A student could use this to recognize common exam framing and then apply definitions to eliminate or accept public debt as a monetary-policy component.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 4. Management of Foreign Exchange Reserves > p. 69
Strength: 4/5
“WMAs are not used to fund Fiscal deficit. • Besides it arranges for investments of surplus cash balances of the Governments as a portfolio manager.• The RBI also acts as advisor to the Government, whenever called upon to do so, on monetary and banking related matters.• 7. Debt Manager of Central and State governments The RBI manages the public debt and issues new loans on behalf of the Central and State Governments. The RBI's debt management policy aims at minimising the cost of borrowing, reducing risk, smoothening the maturity structure of debt. • 8.”
Why relevant

States that the RBI acts as debt manager for central and state governments and manages public debt (minimising cost, smoothing maturity).

How to extend

A student can note that RBI's operational role in managing public debt is distinct from declaring it a monetary-policy instrument; one can investigate whether operational involvement implies policy-component status.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
Strength: 4/5
“• 1. Internal Debt[it is basically what Govt. of India borrows by issuing Debt Securities like Treasury Bills and Dated Securities in the domestic market. It is also called Domestic Market Borrowings]• 2. External Debt [It is basically borrowing from other Governments (bilateral debt) and Multilateral Agencies like World Bank, ADB etc. and FPI purchasing G-Secs]• 3. Public Account Liability [It includes National Small Savings Schemes like Public Provident Fund, Kisan Vikas Patra etc.]• 4. Off budget liabilities [Such financial liabilities of any corporate or other entity owned/controlled by the Central Government, which the Govt. has to repay or service from the Annual Financial Statement.] Internal Debt and external debt combined together is also called Public Debt (of Govt. of India) and it is contracted (on the security of) against the Consolidated Fund of India. • Components of Central Govt.”
Why relevant

Defines public debt as internal + external debt contracted against the Consolidated Fund of India, clarifying it is government borrowing/instrument of the government.

How to extend

Using this, a student can frame public debt as an instrument of government fiscal operations and compare that role with monetary policy instruments to assess overlap or separation.

Statement 4
In the Indian economy, is public revenue a component of monetary policy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"**22 Fiscal Policy** 1. [Meaning and Instruments of Fiscal Policy] 2. [Public Revenue] 3. [Tax] 4. [Progressive, Proportional, Regressive and Digressive Taxation]"
Why this source?
  • The page's table of contents explicitly lists 'Fiscal Policy' as a separate section (22) and includes 'Public Revenue' under that heading.
  • This placement shows 'Public Revenue' is categorized within Fiscal Policy rather than within the Monetary Policy section on the same site.
Web source
Presence: 4/5
"**21 Monetary Policy** 1. [Expansionary Versus Contractionary Monetary Policy] 2. [Instruments of"
Why this source?
  • The same source separately lists 'Monetary Policy' as section 21, indicating distinct treatment from Fiscal Policy.
  • This separation in the table of contents implies public revenue is not listed as a component of Monetary Policy on the site.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 59
Strength: 5/5
“Monetary Policy is the process by which monetary authority (RBI) of a country controls the creation and supply of money in the economy. Over time, the objectives of monetary policy in India have evolved to include maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for”
Why relevant

Defines monetary policy as control of creation and supply of money by the RBI and lists its evolving objectives.

How to extend

A student can contrast this RBI monetary-role description with the nature of public revenue (a government receipt) to judge if public revenue fits as a monetary instrument.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
Strength: 5/5
“It is a macro-economic policy tool used by RBI to influence the supply of money in the economy. As a part of Monetary Policy, the RBI uses various instruments to control the money supply or credit. Policy measures by RBI to increase money supply in the economy in order to promote economic growth are termed as Monetary Easing, and vice versa.”
Why relevant

States monetary policy is a macro tool used by the RBI and that RBI uses specific instruments to control money supply/credit.

How to extend

Combine this with a list of known RBI instruments (bank rate, OMO, reserve ratios) to see that public revenue (taxes/receipts) is not among RBI instruments.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Components of Fiscal Policy > p. 83
Strength: 5/5
“The fiscal policy comprises the following three aspects: • 1. Government receipts, i.e. money received by the Government • 2. Government expenditure, i.e. money spent by the Government Public debt \overline{3} In the process of using fiscal policy, a country may either run into surplus or deficit or balanced budget. All the receipts and expenditure of the Government is credited to (goes into) and debited from (taken out from) the Consolidated Fund of India, Contingency Fund of India and Public Account of India. Consolidated Fund of India (CFI) - CFI is a Government of India's account which is similar to a normal bank account.”
Why relevant

Explains fiscal policy components include government receipts (i.e., money received by the Government) and government expenditure — explicitly categorizing receipts as fiscal items.

How to extend

A student can map 'public revenue' onto 'government receipts' and thus into fiscal rather than monetary policy.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > A. Fiscal Measures > p. 72
Strength: 4/5
“The Government uses fiscal measures to control inflation. The two main components of fiscal policy are government revenue and government expenditure. Under fiscal policy, the government (not RBI) controls inflation and in the following ways: • By reducing private spending (by enhancing taxes on private businesses), i.e. when the 1. government reduces private spending by increasing taxes, individuals decrease their total expenditure; and the money supply in the economy is reduced.• 2. By decreasing non-developmental government expenditure.• 3. By avoiding deficit financing as far as possible. Use of option 2 above may not be feasible all the time as the Government expenditure may be required for ongoing projects and managing strategic sectors like health, education, defence, etc.”
Why relevant

Says the government uses fiscal measures (government revenue and expenditure) to control inflation and explicitly notes 'the government (not RBI) controls inflation' via these measures.

How to extend

Use the distinction that government (fiscal) and RBI (monetary) have different tools to infer public revenue belongs to fiscal toolkit, not monetary.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > egin{array}{c|c|c|c|c} \\hline extbf{2015} & extbf{0} & extbf{0} \\[1ex] \ \hline \ \end{array} > p. 251
Strength: 3/5
“When the Reserve Bank of India reduced the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen? • (a) India's GDP growth rate increases drastically.• (b) Foreign Institutional Investors may bring more capital into our country.• (c) Scheduled Commercial Banks may cut their lending rates.• (d) It may drastically reduce the liquidity to the banking system.• 29. 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• (c) 1 and 2 2014 (b) 2, 3 and 4 30.”
Why relevant

Includes an exam-style list (Bank Rate, Open Market Operations, Public Debt, Public Revenue) asking which are components of monetary policy — implying certain items (bank rate, OMO) are monetary instruments while raising doubt about public revenue's inclusion.

How to extend

A student can note the common exam framing and, using known monetary instruments, eliminate 'public revenue' as atypical for monetary policy.

Pattern takeaway: UPSC frequently tests 'Classification Clarity'. They mix lists (Capital vs Revenue, Monetary vs Fiscal, Money Market vs Capital Market). The goal is to check if your mental filing cabinet is organized or messy.
How you should have studied
  1. [THE VERDICT]: Absolute Sitter. Directly solvable from NCERT Class XII Macroeconomics (Chapter 3: Money and Banking).
  2. [THE CONCEPTUAL TRIGGER]: The fundamental dichotomy of Macroeconomic Policy: Central Bank (Monetary) vs. Executive Government (Fiscal).
  3. [THE HORIZONTAL EXPANSION]: 1. Monetary Tools (RBI): Repo, Reverse Repo, MSF, SDF, CRR, SLR, OMO, Operation Twist, Moral Suasion. 2. Fiscal Tools (Govt): Taxation (GST, Income Tax), Public Debt (T-Bills, Dated Securities), Disinvestment, Subsidies, Deficit Financing.
  4. [THE STRATEGIC METACOGNITION]: Always study policies by 'Authority'. Create a T-chart: Left side = RBI (Liquidity/Interest Rates), Right side = Govt (Budget/Welfare). If the Finance Minister announces it in the Budget, it's Fiscal; if the RBI Governor announces it in the bi-monthly review, it's Monetary.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Bank Rate as a monetary policy instrument
💡 The insight

References explicitly define the Bank Rate and describe how changing it affects money supply, directly tying it to monetary policy operations.

High-yield for UPSC: questions often ask which rates/instruments RBI uses to control liquidity. Understanding Bank Rate shows how policy rates alter commercial bank behaviour and money supply. Connects to topics on credit control, inflation management and central bank tools; revise definitions and transmission mechanism with examples.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 43
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
🔗 Anchor: "In the Indian economy, is the bank rate a component of monetary policy?"
📌 Adjacent topic to master
S1
👉 Types of monetary policy instruments (quantitative vs qualitative)
💡 The insight

Evidence lists that RBI uses various instruments and references 'Quantitative Instruments of Credit Control' and 'Qualitative Instruments', framing where Bank Rate fits.

Frequently tested: UPSC asks to classify instruments and their effects. Mastering this helps answer MCQs and mains questions on policy mix and instrument choice. Study by categorising instruments (rates, reserve requirements, OMO, moral suasion) and mapping effects on money supply and credit distribution.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Money > p. 157
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
🔗 Anchor: "In the Indian economy, is the bank rate a component of monetary policy?"
📌 Adjacent topic to master
S1
👉 Repo/Reverse-repo and transmission of policy rates
💡 The insight

References state repo/reverse-repo operations are the main operational tools and explain how policy rates transmit through markets to influence lending rates.

Important for contemporary questions: UPSC often focuses on the operational framework (repo as main tool) and rate transmission to bank lending. Understanding this complements knowledge of Bank Rate and shows practical policy implementation; prepare by linking rate changes to market transmission channels and macro outcomes.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 43
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Transmission of Repo Rate into Lending Rate > p. 89
🔗 Anchor: "In the Indian economy, is the bank rate a component of monetary policy?"
📌 Adjacent topic to master
S2
👉 Open Market Operations (OMOs) — definition & mechanics
💡 The insight

All cited references define OMOs as RBI's buying/selling of government securities and explain the cash/liquidity exchange mechanism.

High-yield for UPSC: OMOs are a standard monetary policy tool frequently asked in prelims and mains. Understanding the definition and step-by-step mechanics helps answer questions on liquidity management, inflation control and transmission. Learn by linking the operational flow (sell → absorb liquidity; buy → inject liquidity) to macro outcomes.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 3. Open Market Operations > p. 167
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
🔗 Anchor: "In the Indian economy, are open market operations a component of monetary policy..."
📌 Adjacent topic to master
S2
👉 OMOs as an instrument of monetary policy / liquidity management
💡 The insight

References explicitly place OMOs among RBI's major instruments for conducting monetary policy and liquidity operations.

Crucial for both theory and current-affairs questions on central bank tools. Mastering this shows how RBI choices affect money supply, interest rates and inflation; connects to topics like repo/reverse repo, LAF and market stabilization. Prepare by mapping each instrument to its objective and typical use-cases.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 62
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 59
🔗 Anchor: "In the Indian economy, are open market operations a component of monetary policy..."
📌 Adjacent topic to master
S2
👉 Effect of OMOs on money supply and inflation (including sterilisation)
💡 The insight

Evidence links OMO actions (buy/sell of G‑secs) directly to changes in money supply and mentions sterilization uses to offset capital flows.

Important for questions on macro policy responses to inflation and capital flows. Helps answer 'how' and 'why' RBI uses OMOs under different scenarios (inflationary vs expansionary). Study by practicing cause–effect chains and real-world RBI policy examples.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 3. Open Market Operations > p. 167
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "In the Indian economy, are open market operations a component of monetary policy..."
📌 Adjacent topic to master
S3
👉 Public debt as part of Fiscal Policy
💡 The insight

References identify 'public debt' alongside government receipts and expenditures as an element of fiscal policy rather than monetary policy.

Distinguishing fiscal vs monetary policy is frequently tested in economy questions. Mastering this helps answer questions on policy tools, budgetary impact, and macroeconomic management. Prepare by linking textbook definitions of fiscal policy to government accounts (Consolidated Fund, Public Account) and practising comparison-type questions.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Components of Fiscal Policy > p. 83
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
🔗 Anchor: "In the Indian economy, is public debt a component of monetary policy?"
🌑 The Hidden Trap

Standing Deposit Facility (SDF). Introduced post-2015, it allows RBI to absorb liquidity without offering collateral (unlike Reverse Repo). It is the new 'floor' of the liquidity corridor, replacing the fixed Reverse Repo rate in practice.

⚡ Elimination Cheat Code

The 'Who Signed It?' Test. Ask yourself: Who manages this? Bank Rate/OMO are managed by the RBI Governor. Public Debt/Revenue are managed by the Finance Minister (Budget). Monetary Policy is the RBI's domain—so eliminate the Finance Minister's items immediately.

🔗 Mains Connection

Mains GS-3 (Indian Economy): 'Fiscal Dominance'. When Public Debt (Item 3) becomes unsustainable, the RBI is often forced to keep interest rates low to help the Govt service its debt, thereby compromising its Monetary Policy (Item 1 & 2) goal of inflation targeting. This conflict is a classic Mains theme.

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SIMILAR QUESTIONS

CDS-II · 2017 · Q30 Relevance score: 4.90

The monetary policy in India uses which of the following tools? 1. Bank rate 2. Open market operations 3. Public debt 4. Public revenue Select the correct answer using the code given below.

IAS · 2002 · Q87 Relevance score: 3.95

With reference to the Indian Public Finance consider the following statements: 1. External liabilities reported in Union Budget are based on historical exchange rates 2. The continued high borrowing has kept the real interest rates high in the economy 3. The upward trend in the ratio of Fiscal Deficit to GDP in recent years has an adverse effect to private investments. 4. Interest payments is the single largest component of the non-plan revenue expenditure of the Union Government. Which of these statements are correct ?

IAS · 2022 · Q100 Relevance score: 3.24

With reference to the Indian economy, consider the following statements: 1. A share of the household financial savings goes towards government borrowings. 2. Dated securities issued at market-related rates in auctions form a large component of internal debt. Which of the above statements is/are correct?

IAS · 2002 · Q37 Relevance score: 2.21

Which reference to the Indian economy, consider the following activities: 1. Agriculture, Forestry and Fishing 2. Manufacturing 3. Trade, Hotels Transport and Communication 4. Financing, Insurance, Real Estate and Business services The decreasing order of the contribution of these sectors to the Gross Domestic Product (GDP) at factor cost at constant prices (2000-01) is