Monetary Policy

Introduction

In order to accomplish several macroeconomic objectives, monetary policy is a crucial economic tool.
The supply of money and the accessibility of credit in the economy are governed by monetary policy. It
deals with the interest rates commercial banks charge on both borrowing and lending. It strives to
preserve economic growth, full employment, and price stability. The Reserve Bank of India (RBI) is in
charge of developing and carrying out India's monetary policies. It used to be announced twice a year
(during the slow and busy seasons), but today it just happens once. It alludes to the measures a nation's
central bank has taken to restrict credit.

The country's monetary policy can be defined as the efforts made by the monetary authorities to
maximize the advantages of the current monetary system and to decrease the obstacles to economic
development and progress.

Objectives Of Monetary Policy Of India:

1. Price stability is desired.

2. To achieve stability in exchange rates

3. To minimize the effects of the business cycle

4. To experience full employment position

Instruments: The main tools employed to accomplish the aforementioned goals are

Bank rate: the interest rate that the RBI levies on loans taken out by commercial banks. If the RBI raises
the bank rate from 2% to 3%, the commercial banks' rate of interest would follow suit, rising from, say,
7% to 10%, which would diminish public borrowing due to higher interest rates and reduce the amount
of money moving throughout the nation.

Reserve ratio: The RBI requires commercial banks to hold a specific percentage of reserves in their
hands as per the CRR (Cash Reserve Ratio) and SLR (statutory Liquidity Ratio) in order to maintain
liquidity and control lending. The CRR may be raised by the RBI from 3% to 15%. In the event that the
RBI raises CRR from 10% to 12%, the amount of money that banks have available will decrease. As a
result, commercial banks will have less ability to provide credit, and the market's money supply will also
be controlled.

Open market operation: The public is being sold government securities by the RBI. In such situation, the
public would get certificates for a set period of time in place of cash and would also receive interest on
those certificates. But there will be less money moving around in the general population.

Margin requirements: In order to tighten credit, the margin needed to mortgage loans will be raised,
and in order to open up the credit flow, it will be lowered.
Credit rationing: To reduce the amount of money in circulation, loans and advances are only given for
necessary activities such as production.

Moral suasion: RBI manipulates the commercial banks' ability to make loans and advances by issuing
circulars that persuade.

Direct actions: To combat the inflationary scenario, RBI occasionally takes direct action against bank
credit produced in violation of RBI guidelines.

Limitations Of Monetary Policy:

1. The scope of monetary policy is rather vast.

2. Success or failure depends on the nation's banking sector.

3. Institutional limitations apply.

4. The monetary policy is not supported by the unorganized money market.

5. Non-monetized sector existence also violates RBI regulations.

6. In terms of overcoming depression, it is not particularly effective.

Monetary Policy And Economic Development:

1. Credit planning is necessary to support economic development

2. Increasing the banking system's effectiveness

3. Decide interest rates

4. Public debt management

In order to achieve certain macroeconomic objectives, the monetary authorities, including the state
and central bank, take a variety of decisions and actions that have an impact on the money supply and
credit situation in the monetary system as a whole. It deals with the price of credit as well as credit
availability. The attempt by the government or its representative, the central bank, to control monetary
variables, such as the interest rate or the money supply, in order to achieve policy objectives is known as
monetary policy.