252. Monetary & Fiscal Policy

Monetary and fiscal policy are two different arms of macroeconomic stabilisation. Monetary policy changes the price and quantity of money through the Reserve Bank of India, while fiscal policy changes public receipts, public spending and borrowing through elected governments. A rate cut lowers the short-term policy signal and may reduce lending rates with a lag; a higher fiscal deficit raises government borrowing and can support demand or crowd out private credit depending on conditions. The clean separation is institutional: RBI uses repo, reverse repo, SDF, MSF, CRR, SLR and OMO; the Union and State governments use taxes, expenditure, subsidies, borrowing, transfers and guarantees.

The distinction also prevents a common policy error. Monetary easing can make finance cheaper, but it cannot choose which road, canal, health centre or power feeder receives money. Fiscal expansion can build such assets, but it cannot by itself maintain the currency and credit conditions needed for stable prices. When both arms move in the same direction, aggregate demand changes faster; when they pull in different directions, the final effect depends on banks, bond yields, tax collections and household expectations.

RBI Repo Rate (Monetary Policy Committee 2024-25 cycle) is the current anchor because the repo rate moved from a long 6.50 per cent pause to 6.25 per cent on 7 February 2025 and then to 6.00 per cent on 9 April 2025. The April 2025 decision also placed the SDF at 5.75 per cent and the MSF and Bank Rate at 6.25 per cent, forming a corridor around the policy rate. A repo-rate question therefore asks who lends to whom, at what rate, against what collateral and with what liquidity effect. Repo injects overnight liquidity to banks against government securities; reverse repo absorbs liquidity from banks; SDF absorbs liquidity without collateral.

Rajasthan makes this national framework visible because the state's borrowing cost, power-sector liquidity and infrastructure pipeline are affected by the same interest-rate environment. Rajasthan Budget 2025-26 estimated fiscal deficit at Rs 84,643.63 crore, or 4.25 per cent of GSDP. When RBI eases, the transmission can reduce debt-servicing pressure and project-finance costs, but it does not erase fiscal arithmetic. For a state expanding solar, roads and water infrastructure, the repo cycle matters through bond yields, bank lending rates and the cost of carrying public debt.