It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system. In other words, it means utilization of all the productive natural, human and capital resources in such a manner as to ensure a sustained increase in national and per capita income over time. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. To Control Business Cycles: Boom and depression are the main phases of business cycle. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy. Summary Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy. In a nutshell planning in India aims at growth, stability and social justice.
This paper exposits the monetary policy design problem within the limits of an empirical framework for the Indian economy. The commercial banks, in reaction, raise their lending rates to the business community and borrowers who further borrow less from the commercial banks. It regulates the stocks and the growth rate of money supply. People live in rural areas where many of the transactions are of the barter type and not monetary type. On the other hand, if the production of goods and services increases at a fast rate and the supply of money increases at a slow rate the result is recession and maybe depression.
Alternatively, to prevent the depreciation of the rupee, Reserve Bank can release more dollars from its foreign exchange reserves. This will also work to reduce the demand for dollars which will prevent the fall in the value of the rupee. The proper objective of the monetary policy is to be selected by the monetary authority keeping in view the specific conditions and requirements of the economy. This provides a safety valve against unanticipated liquidity shocks to the banking system. The process of intermediation can be further complicated in circumstances where firms may have alternatives to bank credit to finance their business operations, e. This creates a major bottleneck in the implementation of the monetary policy. The role of communication policy, therefore, lies in articulating the hierarchy of objectives in a given context in a transparent manner, emphasising a consultative approach as well as autonomy in policy operations and harmony with other elements of macroeconomic policies.
As reduction in money supply increases the interest rates, the borrowers will be reluctant to borrow the money due to higher borrowing cost which ultimately reduces the economic activity. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives. Conditions Dictate Objectives and Institutional Structure The conduct of monetary policy by the Reserve Bank of India has been guided by both price stability and financial stability objectives. Department of Communication Reserve Bank of India. . Monetary policy refers to the credit control measures adopted by the central bank of a country.
Let us now see objectives of monetary policy in detail :- 1. It states the objectives of monetary policy in India and argues that, with widespread poverty still present, inflation control cannot be an exclusive concern of monetary policy. If the monetary policy is expansionary then credit supply can be encouraged. It implies Control over inflation. Why monetary policy is ineffective in India? In other words, monetary authority should follow an easy or tight monetary policy to suit the requirements of growth.
This article reviews inflation targeting experience so far and analyses the issues related to it. The financial reforms of which deregulation of interest rates formed a major part during the 1990s and the early 2000s and the changing role attributed to different policy rates during the reforms make India an interesting case study. Those sectors which are quite significant for the economic growth are provided with adequate availability of credit. It was regarded as socially dangerous, economically wasteful and morally deplorable. It ensures adequate availability of credit for growth and tries to achieve price stability. Definition of Monetary Policy Many economists have given various definitions of monetary policy.
In the opposite case, when the reserve ratio is lowered, the reserves of commercial banks are raised. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. In general, it is found that there has been an improvement in efficiency, competitiveness and health of all the segments of the Indian financial sector. Monetary policy regulates money supply to maintain price stability. Every bank is required by law to keep a certain percentage of its total deposits in the form of a reserve fund in its vaults and also a certain percentage with the central bank. Inflation targeting ion India should wait until financial sector reform agenda is accomplished.
Why should a country need a monetary policy? It may however be noted that price stability does not mean absolutely no change in price at all. Thirdly, when due to a higher rate of inflation value of money is rapidly falling, people do not have much incentives to save. An increase in bank rate is likely to increase all other interest rates and decrease the total money supply. When there was disequilibrium in the balance of payments of the country, it was automatically corrected by movements. According to neutralists, the monetary change causes distortion and disturbances in the proper operation of the economic system of the country. It has been in place for a decade or more in a number of countries — with around 20 central banks adopting it as their basic monetary policy framework. Thus the main aim of the monetary authority is not to deviate from the neutrality of money.