Monetary Policy In India

Having now explained that investment is mainly determined by the aggregate demand for pro, [. uets and availability of credit rather than cost of credit or rate of interest we are now in a position -o spell out the role of monetary pohcy in promoting investment in a developing country like Indi 327 t. Further, in this context it is noteworthy that in developing countries,nature. In the general category are included a crucial role in the development restrictioneconomies. suasion. In Specific Government or public mvestment plays measures such as voluntary credit of their and moral Therefore', monetary policyspecific measures there exist measures to controlbut also public investment by making available anequate the category of r.'quires to promote not only privateinvestment credit institutions. amount of credit. For the purpose of regulating the individual credit institutions, the method of varying the reserve requirements is Monetary Policy and Public Investment. divert first explain the promotion of channels, &Cstment through quite effective. On the other hand, in order to Let us the financial resources into desiredthe public the method of credit monetary policy, Monetary policy has to Bank. This maybanking system contnbutes to theon the aggregate portfolio public rationing should be used by the Central ensure that the be done by fixation of a ceiling financing of the planned of the investment. For this thereby part of bank deposits that loans and the banks do not exceed the fixedGovernment and other commercial banks, a good making it incumbent mobilised by advances should be invested in ceiling. Alternatively, approvedbe done by directly allocating funds that .able b e granted its planned Besides, policies such in infrastructure. it may securities so that the gover-iment should be an to finance and used. investment, especially as the selective At present .n India,prior deposit requirement policy suchthe fixation roads, highways, ports, policy can also be adopted to rediscount policy, there is lack (If infrastructure and as power, of deposit requirement irrigation facilities which is obstructing economic growth, Besides, our industryoutfacing demand recession. In this situatic n public investmentof the achieve similar goals. However, it may be pointed is that the potency of credit planning depends upon the extent is an ideal tool to develop infrastructure and to increase the demandstrive for an II productsof credit planning over of multiplier. area over which it operates. The developing economies must for industr: extension through the operation wider areas. This will stimulate private investment. Therefore,:n our view, policy of raising public investment will crowd in private Credit rather measures such out. In above new technique of monetary policy has been designed to secure larger investment controlthan crowding itas noted India a promote growth by directing the stream of domestic savings into the desired lines of the banking system such as lengthening investment. This technique has been margin requirements, reSOUf('",S frominvestment. Measuresfor i"il.~ncing public the periods of repayment, lowering ofdescribed < s Statutory providing rediscounting facilities at this, below the to cash reserve requirements ban'c in India are required to keep a Liquidity Ratio (SLR). According to rates in additionbank rate, provision of special loans to conunercial banks to be used for specific purposes its total demand of special Investment Corporations can provide the And the inducement to min:mum proportion of or the setting upand time deposits in the for 1 of specified liquid assets. required most important channelise savings in the this purposes is I. .: investment in Government and may securities. To raise the lendable specified liquid asset for desired directions. In the indirect sense, these measures other prove conducive to growth in two ways. Firstly, banks, cash reserve control measures prevent the at low from resources of thethe qualitative creditratio of the banks must be kept savingslevel. being wasted in unproductive channels. Through their application it 'becomes possible to deny or discourage certain lines of'investment that are inimical to the iI-;one'ary economy. However, the extent to which such measures can help providing resources for investment as it growth of thePo!;,)" ;J fr;,.' '',e<'JllP't, If the p';"'" sector pie' 5 an important role o- ." "elopment process,j., the does in l!1'.!;:!.'smixed economy, <her: monetary policy hasof creditens'; .,. that the need for l.ank credit forprevented. desired directions depends on the extent to which the flow also to to-cards the undesirable channels can investment and production in the private sector are fully met. Tic banks must provide adequate bank credit to meet at least essential Secondly, such measures may go a and way in galvanising the process of growih by restraining funds fUand its working capital requirements of industry long agriculture. Both large-scale and medium industries requireinflation i adverse effects. When inflationary tendencies set in, generally inventories. Subject to appropriate tend fi'.; In investment I fixed capital, working capital and for maintaining the bank advances to businessmennormsto rise. for this I way certain undesirable and needs of the enterprises may grow and flourish. For instance, ;0 the private as speculative inventory holdings, the credit unproductiveprivate sector should be met if existing capacities activities such sector are to demand for and also up inventories, capacity is to be built up. It maybe purchase of foreign exchange and real estate be fully used building more productiveaccumulation of precious metals fornoted that in India commercial banks provide aget a fillip. Growth of these and such other unwanted activities canit substautic! part by the requirements ofrequirements good amount of funds to the terms-lending instinlions which meet be held in check of raising the margin the private for the blackballed collaterals. Further, the monetary authority can fix a ceiling by holding the credit takes the form of sector for financing invesune., in industry ami agriculture. Besides. nearly 7. 5 per cent of bank loans and advances of the value of the collateral. Thus, it and thereby dircctlv Finances private investment. term loans 1,1 the private sector serves the dual purpose of curbing inflation and protecting certain essential productive forms of investment from being mds (c) Allocation of Investment Y .restricted. In the context savings alone development Proper canalisat.cu of countries, the use of methods of'selective is or Mobilisation of of the planned would not do. of the underdeveloped these into suitable dirccrions of investmentcredit controls and important than are not only necessary but also pohc should restrict the growth horizons lines of perhaps more credit rationing mobilisation itself. The monetary essential. They greatly widen theof wastefulof de ... clcpmcat which are inimical and desired directions. They be able to helpful ;1\ preventing inflation but also In rhis investmentalong predeterminedto economic growth. i; shouldare not onlydirect investment in productive channels.act m a positive metlns of policy has t, plcy a of economic development in the desired possible through its operations to regard, the monetarydirecting the process selective or qualitative role on so far as it is lilies. Furthermore, the policy of selective credit controls is especially suited to outlays. It should give a fillip 10 the former oed stint tf, .growth of the discriminat' between productive and unproductive the reeds of'underdeveloped countries where the orthodox monetary techniques have has to applicability. As is, the structure of these economies is not which are most significant to totter. Further, it limIed be designed as toitinfluence the specific sectors and industrie' very conducive to the general methods of credit control. affectthe growth of the economy. In fact, the paniculariscd applies tion of credit can greatly activise the process of economic growth. Therefore, it :s necessary by the government In credit rationing withits endeavour "tl) accelerate the TIle huge investment expenditure made t. operate the selective the public sector in a view to III/h:ence the pal/ern ofinvesnneru. However, \1 the gamut of monetary policy, thereauthority. Thecredit control measures of fact, subversive.]to process of growth is not amenable to control by the monetary are selective menClary authority is, in both general a n the wishes of the government in the matter of providing re-ources for development. Further, in order to help government borrowings, the bank rate policy of 'i 1 l tcentral Bank tends to become more or less inflexible. Besides, for the sake of :; supporting govern'itlenl loans. the central bank is also required to stabilise the securities market. It, there tore, sets a

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