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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 …
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Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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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.

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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.
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