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What is Monetary Policy?

Monetary policy aims at influencing the economic activity in the economy mainly through two major variables, They are (a) money or credit supply, and (b) the rate of interest.

Monetary policy of India

In India, the central monetary authority is the Reserve Bank of India (RBI). It is designed to maintain price stability in the economy. Other objectives of the financial policy of India, as stated by RBI, are:

  • Price stability: Price stability implies promoting economic development with considerable emphasis on price stability. The center of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.
  • Controlled expansion of bank credit: One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to the seasonal requirement for credit without affecting the output.
  • Promotion of fixed investment: The aim here is to increase the productivity of investment by restraining non-essential fixed investment.
  • Restriction of inventories and stocks: To avoid this problem, the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization.
  • Promoting efficiency: It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, easing operational constraints in the credit delivery system, introducing new money market instruments, etc.

Objectives of Monetary Policy

  1. Manage inflation. Most economists consider this the one true objective of monetary policy. In general, low inflation is most conducive to a healthy, thriving economy. Therefore, when inflation is on the rise, the Federal Reserve may adjust monetary policy to reduce inflation.
  2. Stabilizing the Business Cycle: It has an important effect on both actual GDP and potential GDP. Industrially advanced countries rely on monetary policy to stabilize the economy by controlling the business. But it becomes impotent in deep recessions.
  3. Reduce Unemployment: Monetary policies can influence the level of unemployment in the economy. For example, an expansionary monetary policy generally decreases unemployment because the higher money supply stimulates business activities that lead to the expansion of the job market.
  4. Price Stability Price stability is perhaps the most important goal which can be pursued most effectively by using monetary policy. In a developing country like India, the acceleration of investment activity in the face of a fall in agricultural output creates excessive pressure on prices. The food inflation in India is proof of this. In such a situation, It has much to contribute to short-run price stability.
  5. Economic Growth: It promotes faster economic growth by making credit cheaper and more readily available. Industry and agriculture require two types of credit—short-term credit to meet working capital needs and long-term credit to meet fixed capital needs.
  6. Exchange Rate Stability: To prevent large depreciation or appreciation of the rupee in terms of the US dollar and other foreign currencies under the present system of floating exchange rate, the central bank has to adopt suitable monetary measures. India by the Reserve.

Monetary policy of India