Stimulus: fiscal and monetary
How a government and a central bank push a slowing economy, how a bailout differs, and what India did in 2020
Policy rate as on 7 October 2026; Budget figures for 2026-27; past episodes as dated
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room what they remember of 2020: free grain, a loan moratorium, rate cuts, a '₹20 lakh crore package'. Every one of those was a form of stimulus. This deck sorts them into fiscal, monetary and rescue measures.
A stimulus is a deliberate push to spending when an economy slows sharply.
The Government pushes through its budget. RBI pushes through the price and quantity of money. A bailout is narrower: a rescue of one firm or sector.
Trainer notes
The aim of a stimulus is to keep spending, jobs and lending going through a shock. It does not create value by itself; it buys time until normal demand returns.
Three kinds of support
Fiscal stimulus
The Government spends more, cuts taxes or sends money to households and firms. It is usually paid for by borrowing, so the fiscal deficit widens.
Monetary stimulus
RBI's Monetary Policy Committee cuts the repo rate. RBI also adds cash to the banking system and may ease rules on loans. Borrowing costs fall and credit is easier to get.
Bailout
Public money, a guarantee or an arranged rescue for a firm whose failure could harm many others, such as a bank. The aim is to stop the damage spreading.
Source for the committee's role: RBI, Resolution of the Monetary Policy Committee, 27 Mar 2020.
Trainer notes
Fiscal measures pass through the Budget, which Parliament approves. Fiscal measures pass through the Budget, which Parliament approves. The six-member committee decides the repo rate and the stance; RBI itself runs the other tools, such as CRR changes and liquidity operations. A bailout can be fiscal (public money) or arranged by a regulator using its legal powers, as the Indian case later in this deck shows., such as CRR changes and liquidity operations. A bailout can be fiscal (public money) or arranged by a regulator using its legal powers, as the Indian case later in this deck shows.
Why ₹100 can become more than ₹100
THE MULTIPLIER
The Government spends an extra ₹100 crore on roads. Assume that everyone who receives extra income spends 60% of it on goods made in India and saves the rest.
All figures are assumed.
- Round 1: workers and suppliers receive ₹100 crore and spend 60% of it: ₹60 crore.
- Round 2: shopkeepers receive ₹60 crore and spend ₹36 crore. Round 3: ₹21.60 crore, and so on.
- Total spending = 100 ÷ (1 − 0.6) = ₹250 crore. The multiplier is 250 ÷ 100 = 2.5.
- If people spend 40% instead, the total is 100 ÷ (1 − 0.4) = ₹166.67 crore: a multiplier of about 1.67.
Result: ₹1 of stimulus can raise total spending by more than ₹1. How much depends on people's choices.
Illustration with assumed figures. Real-world multipliers are estimates and vary widely.
Trainer notes
Money also leaks out of each round as taxes, imports and saving, which is why real multipliers are smaller than the simple formula suggests. If government borrowing pushes up interest rates, private borrowing can fall; this is called crowding out. We do not quote a figure for India's multiplier.
India in 2020: what was done
| When | Who | What |
|---|---|---|
| Mar 2020 | Government | ₹1.70 lakh crore relief package: free food grains, and cash payments to women, poor senior citizens and farmers. |
| 27 Mar 2020 | RBI | Repo cut 0.75 point to 4.40%. CRR cut from 4% to 3% for a year, releasing about ₹1.37 lakh crore. Lenders could allow a 3-month EMI pause. |
| 12-17 May 2020 | Government | Package announced at ₹20 lakh crore, about 10% of GDP. States' borrowing limit 3% to 5% for 2020-21 only; mostly reform-linked. |
| 22 May 2020 | RBI | Repo rate cut to 4.00%. The pause on loan instalments extended to 31 August 2020. |
| 2020-21 | Government | Central fiscal deficit 9.2% of GDP, against 4.6% in 2019-20. |
Sources: RBI MPC resolutions and policy statements, 27 Mar and 22 May 2020; PIB (Ministry of Finance), 17 May 2020; Budget at a Glance 2026-27.
Trainer notes
The ₹20 lakh crore headline counted the earlier relief package and RBI's measures as well as the new announcements. The jump in the deficit was not all stimulus: a deficit also widens when an economy shrinks and tax collections fall.
A headline is not a budget cost
Packages mix spending with loans, guarantees and RBI measures. Three items from 2020:
Guaranteed loans
Up to ₹3 lakh crore of extra bank credit for firms, fully Government-guaranteed.
Fund of funds
₹50,000 crore of equity for small firms via a fund of funds; Government corpus ₹10,000 crore.
Subordinate debt
₹20,000 crore of loans for stressed small firms; ₹4,000 crore Government support to a guarantee trust.
Take-away: The Economic Survey 2020-21 put all the measures together at ₹29.87 lakh crore, about 15% of GDP.
Source: Economic Survey 2020-21, Volume 2, Chapter 8, Box 1 (Ministry of Finance, Jan 2021).
Trainer notes
A guarantee costs the Government money only if borrowers default. A fund of funds aims to draw in other investors alongside the Government's corpus. So the headline adds up items of very different kinds; the budget's own cost shows in the fiscal deficit, on the next slide. The ₹29.87 lakh crore covers all three rounds of the package, not only the May 2020 announcements.
The budget cost: the fiscal deficit
| Fiscal deficit, % of GDP | |
|---|---|
| 17-18 | 3.5 |
| 18-19 | 3.4 |
| 19-20 | 4.6 |
| 20-21 | 9.2 |
| 21-22 | 6.7 |
| 22-23 | 6.5 |
| 23-24 | 5.5 |
| 24-25 | 4.8 |
| 25-26 RE | 4.4 |
| 26-27 BE | 4.3 |
Read the chart
- The deficit doubled from 4.6% of GDP in 2019-20 to 9.2% in 2020-21.
- It has been brought down each year since: 4.4% in 2025-26 (revised estimate).
- Debt stays higher for longer: 52.3% of GDP in 2019-20, 61.4% in 2020-21, 55.6% budgeted for 2026-27.
Source: Budget at a Glance 2026-27, Deficit Trends and Trends in Debt (debt as defined in the FRBM Act), Ministry of Finance, 1 Feb 2026.
Trainer notes
RE is the revised estimate and BE the budget estimate. Borrowing to support the economy is repaid, or rolled over, by later budgets; interest on it is paid every year. See the deck 'Fiscal deficit and the Budget'.
Monetary stimulus, and its exit
| Repo rate (%) | |
|---|---|
| 2008 | 9.00 |
| 2009 | 4.75 |
| 2019 | 5.15 |
| 2020 | 4.00 |
| 2023 | 6.50 |
| 2025 | 5.25 |
| 2026 | 5.50 |
Read the chart
- 2008-09: cut from 9.00% to 4.75% in under nine months. CRR cut from 9% to 5%.
- 2020: cut from 5.15% to 4.00% within two months. CRR cut to 3%.
- The exit: CRR back to 4% by May 2021; repo raised from May 2022 to 6.50% by Feb 2023.
- On 7 Oct 2026 the repo rate was raised to 5.50%.
Sources: RBI Handbook of Statistics 2025-26, Table 40 (policy rates and CRR); RBI Monetary Policy Statement, 7 Oct 2026.
Trainer notes
Dates are the dates each rate took effect: 30 Jul 2008, 21 Apr 2009, 4 Oct 2019, 22 May 2020, 8 Feb 2023, 5 Dec 2025 and 7 Oct 2026. The chart shows selected turning points, not every change. Stimulus has to be withdrawn once the shock passes; the withdrawal is as much a part of the policy as the cut.
Two rescues, side by side
| United States, 2008 | India, 2020 | |
|---|---|---|
| The trouble | The 2008 financial crisis, which the US Treasury calls the worst since the Great Depression. | Yes Bank could not raise capital, faced deposit withdrawals and had serious governance problems, RBI said. |
| The rescue | A law of 3 Oct 2008 authorised $700 billion for the Troubled Asset Relief Program (TARP). | A moratorium from 5 Mar 2020; a reconstruction scheme notified on 13 Mar 2020. |
| The money | Investments in banks, an insurer and carmakers, plus housing and credit programmes. $443.5 billion paid out. | Notified scheme: investor bank to hold 26% to 49% after buying new shares, and not below 26% for three years. |
| The outcome | Lifetime cost to the US Treasury: about $31.1 billion. All programmes had closed by 30 Sep 2023. | A new board took office. RBI had said depositors' interest would be 'fully protected'. |
Sources: US Treasury, 'About TARP'; RBI press releases of 5 and 20 Mar 2020; Yes Bank Limited Reconstruction Scheme, 2020 (G.S.R. 174(E), 13 Mar 2020).
Trainer notes
Rescues raise a hard question, called moral hazard: if lenders and owners expect to be rescued, they may take more risk. That is why rescues usually come with a price for owners and managers, such as a new board or diluted shares. In the Indian case the investor bank was a public sector bank.
Where things stand
As on the dates shown. RBI's stance is 'calibrated tightening', and the budget plans a smaller deficit.
- REPO RATE
- 5.50%Raised 0.25 point on 7 Oct 2026. Stance: 'calibrated tightening'.
- FISCAL DEFICIT
- 4.3%Of GDP, budget estimate for 2026-27. 4.4% in 2025-26 (revised).
- CENTRAL DEBT
- 55.6%Of GDP, budgeted for 2026-27. It was 61.4% in 2020-21.
- CPI INFLATION
- 5.54%September 2026, provisional. Target 4%, band 2% to 6%.
Sources: RBI MPC resolution, 7 Oct 2026; Budget at a Glance 2026-27; MoSPI CPI release, 12 Oct 2026; inflation target notification, 25 Mar 2026.
Trainer notes
State the facts and stop. We do not predict whether or when a stimulus will return, and we do not suggest what a client should do because of it.
Four things people get wrong
Misconception'The headline is what the budget spends.'
What is trueIndia's 2020 headline counted loans, guarantees and RBI measures. The budget's own cost shows in the fiscal deficit.
Misconception'Stimulus is free money.'
What is trueFiscal stimulus is usually paid for by borrowing, which later budgets service. Monetary stimulus is usually withdrawn later.
Misconception'A rate cut lowers my EMI the next day.'
What is trueFloating rates reset on dates fixed in the loan; fixed rates hold for the fixed period.
Misconception'A bailout rescues the owners.'
What is trueRescues often aim at depositors and the wider system. In India's 2020 case a new board took over and a new investor came in.
Trainer notes
On the last point: when the investor bank bought new shares, the existing shareholders came to own a smaller part of the bank. Rescues differ case by case; this is one example, not a rule.
Check yourself
Question 1: Sort these into fiscal, monetary or bailout: a repo rate cut; free food grains; a scheme to recapitalise a failing bank; a cut in CRR.
Answer: Repo cut and CRR cut: monetary. Free food grains: fiscal. Recapitalising a failing bank: a bailout or rescue.Question 2: The Government spends ₹100 crore and people spend 50% of any extra income. Using the simple multiplier, how much total spending results?
Answer: 100 ÷ (1 − 0.5) = ₹200 crore, a multiplier of 2. In practice taxes, imports and saving make the effect smaller.Question 3: A client says India spent ₹20 lakh crore in 2020. What is a more precise way to describe the package?
Answer: It was announced at about ₹20 lakh crore, about 10% of GDP, but included loans, guarantees and RBI measures. The budget's own cost shows in the fiscal deficit: 9.2% of GDP in 2020-21.
Sources and disclaimer
Sources for the figures in this explainer
- RBI 2020 measures: MPC resolutions and Statements on Developmental and Regulatory Policies, 27 Mar and 22 May 2020. Policy rate history: RBI Handbook of Statistics 2025-26, Table 40.
- 2020 packages: PIB (Ministry of Finance) release of 17 May 2020; Economic Survey 2020-21, Volume 2, Chapter 8 (Jan 2021).
- Fiscal deficit and debt, 2017-18 to 2026-27: Budget at a Glance 2026-27, Ministry of Finance, 1 Feb 2026.
- TARP: US Treasury, 'About TARP' (as of 30 Sep 2023). Yes Bank: RBI releases of 5 and 20 Mar 2020; Reconstruction Scheme 2020 (G.S.R. 174(E), 13 Mar 2020).
- Repo rate and stance: RBI Monetary Policy Statement, 7 Oct 2026. CPI: MoSPI press release for September 2026, 12 Oct 2026.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).