Monetary Policy refers to the measures pertaining to policy undertaken by the Central Bank (RBI) to influence the availability; determine the size and rate of growth of the money supply in the economy.
In other words, monetary policy can be defined as a process of managing a nation’s money supply to contain/control the inflation, achieving higher growth rates and achieving full employment.
Generally, all across the globe, monetary policy is announced by the central banking body of the country, for example the RBI announces it in India. India entered into the era of economic planning in 1951.
The Monetary and Fiscal Policies had to be adjusted to the requirements of the planned development in the country and accordingly, the economic policy of the Reserve Bank was emphasized on two objectives:
– To speed up the economic development of the nation and raise the national income and standard of living of the people.
– Control and reduce the “Inflationary” pressure on the economy.
Monetary policy is of two kinds:
Expansionary Monetary Policy: It increases the supply of money in an economy by making credit supply easily available. Money produced through such a policy is called as cheap money. An expansionary monetary policy is required when an economy goes through a phase of recession accompanied by lower levels of growth/high levels of unemployment. But risk associated with EMP is inflation.
Contractionary Monetary Policy: It decreases the supply of money in the economy. Contractionary
monetary is used to tackle the menace of inflation in the economy by raising the interest rates.
Objectives of Monetary Polity
In India, as defined by former RBI governor C. Rangarajan, broad objectives of monetary policy are:
– To regulate monetary expansion so as to maintain a reasonable degree of price stability; and
– To ensure adequate expansion in credit to assist economic growth
Further the objectives of Monetary Policy are:
– It leads to economic growth: The monetary policy can influence economic growth by controlling real interest rates and its resultant impact on the investment. If the RBI opts for a cheap credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth.
– Price Stability: Inflation and deflation both are not suitable for an economy. Price stability is defined as a low and stable order of inflation. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable.
- Exchange Rate Stability: If exchange rate of an economy is stable it shows that economic condition of the country is stable. Monetary policy aims at maintaining the relative stability
in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the
demand for foreign exchange and tries to maintain the exchange rate stability.
– It generates employment: Monetary policy can be used for generating employment. If the monetary policy is expansionary then credit supply can be encouraged. It would thus help in creating more jobs in different sector of the economy.
– Equitable distribution of income: Earlier many economists used to justify the role of the
fiscal policy in maintaining economic equality. However, in recent years economists have given
the opinion that the monetary policy can play a supplementary role in attainting economic