Expansionary policies in a slowing economy

 Expansionary policies in a slowing economy 

•  The Reserve Bank of India (RBI) implemented two consecutive rate cuts in 2025 - a 25 basis points cut in April followed by a 50 basis points cut in June, bringing the policy repo rate to 5.5%. 

•  The RBI forecasts a GDP growth of 6.5% for 2025-26, with inflation expected to remain within the band of 4% +/- 2%, providing room for the rate cuts. 

•  The expansionary monetary policy through rate cuts follows the expansionary fiscal policy of income tax cuts announced in February 2025, raising questions about policy coordination. 

•  Both fiscal and monetary policies affect aggregate demand and inflation - monetary policy through interest rates impacting investments, and fiscal policy through government spending or tax reductions influencing aggregate demand and consumption. 

•  The United Kingdom and the United States witnessed the nullification of expansionary fiscal policy effects through contractionary monetary policy, where tax cut announcements were met with reluctance to reduce interest rates due to inflationary concerns. 

•  During the 2008 recession, when interest rates hit zero, making monetary policy ineffective, governments increased spending to achieve full employment. 

•  Inflation in India fell to a six-year low of around 3% in June 2025, attributed to early monsoons and a good harvest, though challenges like U.S. tariff wars and Iran conflict pose risks. 

•  A State Bank of India (SBI) report revealed credit growth declined to a three-year low of 9% in May 2025, while unemployment increased from 5.1% in April to 5.6% in May 2025. 

•  The economy's slowdown post-income tax cuts challenges the theoretical framework of inflation targeting, which assumes individuals are forward-looking and can convert future windfalls into current spending. 

•  If output doesn't rise sufficiently, reduced tax collections could increase the fiscal deficit, potentially forcing government spending cuts that might impact vulnerable populations dependent on revenue spending. 

•  The article suggests that with increasing monopoly capital power and shift towards profits over wages, sustained government intervention to boost wages and consumption power for lower economic segments is necessary. 

Related Mains PYQs 

UPSC 2019 

Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (Answer in 150 words)  

Related Prelims PYQs 

UPSC 2021 

With reference. to Indian economy, demand-pull inflation can be caused/ increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. Inflation-indexing wages 4. Higher purchasing power 5. Rising interest rates Select the correct answer using the code given below.  

A. 1, 2, and 4 only 

B. 3, 4, and 5 only 

C. 1, 2, 3, and 5 only 

D. 1, 2, 3, 4, and 5 

UPSC 2020 

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? 1. Cut and optimize the Statutory Liquidity Ratio

 2. Increase the Marginal Standing Facility Rate

3. Cut the Bank Rate and Repo Rate Select the correct answer using the code given below:  

A. 1 and 2 only 

B. 2 only 

C. 1 and 3 only 

D. 1, 2 and 3 

UPSC 2021 

Which among the following steps is most likely to be taken at the time of an economic recession? 

 A. Cut in tax rates accompanied by increase in interest rate 

B. Increase in expenditure on public projects 

C. Increase in tax rates accompanied by reduction of interest rate 

D. Reduction of expenditure on public projects 

 

 

UPSC 2019 

Which one of the following is not the most likely measure the Government/ RBI takes to stop the slide of Indian rupee?  

A. Curbing imports of non-essential goods and promoting exports 

B. Encouraging Indian borrowers to issue rupee denominated Masala Bonds 

C. Easing conditions relating to external commercial borrowing 

D. Following an expansionary monetary policy 

UPSC 2015 

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 

B. 2, 3 and 4 

C. 1 and 2 

D. 1, 3 and 4 

UPSC 1993 

Variable reserve rates and Open Market Operations are instruments of  

A. Fiscal Policy 

B. Monetary Policy 

C. Budgetary Policy 

D. Trade Policy 

UPSC 2015 

When the Reserve Bank of India reduces 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 

UPSC 1994 

Which one of the following governmental steps has proved relatively effective in controlling the double-digit rate of inflation in the Indian economy during recent years?  

A. Enhanced rate of production of all consumer goods 

B. Streamlined public distribution system 

C. Pursuing an export-oriented strategy 

D. Containing budgetary deficits and unproductive expenditure 

UPSC 2022 

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities. 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct?  

A. 1 and 2 only 

B. 2 and 3 only 

C. 1 and 3 only 

D. 1, 2 and 3 

UPSC 2021 

Indian Government Bond Yields are influenced by which of the following? 1. Actions of the United States Federal Reserve 2. Actions of the Reserve Bank of India 3. Inflation and short-term interest rates Select the correct answer using the code given below.  

A. 1 and 2 only 

B. 2 only 

C. 3 only 

D. 1, 2 and 3