Statistics Article Writing

Monetory Policy and it's

impact on Economic Stability

Submitted by - Vinish Chandra 2315124

Sachin Madaan 2315115
Aditya Agarwal 2315119
 INTRODUCTION

Monetary policy refers to the strategies and actions

undertaken by a country's central bank to regulate
the money supply, manage inflation, and achieve
sustainable economic growth. It involves adjusting
interest rates, buying or selling government bonds,
and setting reserve requirements for banks. In the
context of India, monetary policy plays a crucial role
in stabilizing the economy, controlling inflation, and
fostering conditions that support the economic
development goals of this burgeoning economy.
Governed by the Reserve Bank of India (RBI), the
country's monetary policy aims to maintain price
stability while keeping in mind the objective of
growth. Given India's significant role in the global
economy, its monetary policy not only has local but
also international implications, affecting global
market trends, investment flows, and economic
sustainability.
The Reserve Bank of India (RBI) stands at the
core of India's financial system, wielding the
monetary policy as a primary instrument to
navigate the country's financial stability and
economic growth. As the central bank, the RBI's
objectives encompass managing inflation,
supervising the liquidity in the banking system,
and promoting a healthy financial environment
conducive to economic development. To achieve
these ends, the RBI employs several key tools:
 1. Repo Rate: This is the rate at which the RBI lends
money to commercial banks. A lower repo rate can
stimulate economic growth by making borrowing cheaper
for businesses and consumers, whereas a higher rate can
help control inflation by making borrowing more expensive.

2. Reverse Repo Rate: Conversely, this is the rate at which

the RBI borrows money from the banks. Adjusting the
reverse repo rate helps the RBI manage the money supply
within the economy.

3. Cash Reserve Ratio (CRR): This requires banks to hold a

certain percentage of their deposits in reserve with the
RBI. By adjusting the CRR, the RBI can control the amount
of funds available in the banking system for lending,
thereby influencing economic activity and inflation.

4. Statutory Liquidity Ratio (SLR): Similar to the CRR, this

mandates banks to keep a portion of their deposits in the
form of government securities. It influences the bank's
lending capacity and liquidity in the financial system.

Through these mechanisms, the RBI meticulously calibrates

the flow of money in the Indian economy. Its actions are
aimed at ensuring inflation remains within a targeted range
, thereby fostering an environment of financial stability and
contributing to the overall economic prosperity of a
nation

ECONOMIC INDICATORS

1.) Inflation Rate (CPI)

The inflation rate, measured by the Consumer Price Index
(CPI), represents the annual percentage change in the
cost of a basket of goods and services consumed by
households. It's a key indicator of purchasing power and
economic health.
Monetary adjustments, such as altering interest rates or
modifying the money supply, significantly impact inflation
trends. Central banks use these tools to control inflation by
either stimulating the economy to prevent deflation or
cooling
it down to avoid excessive inflation, thus maintaining
economic stability.
2.) Unemployment Rate

The unemployment rate refers to the ratio of people who

are willing to do work but didn't get the work to total
number of labour force present in a country.

1. In the initial years of development planning after

independence, unemployment was not expected to be a
major issue. It was assumed that reasonable economic
growth and labor-intensive sectors would prevent
unemployment from rising.

2. However, the actual economic growth was slower

(around 3.5% per annum) compared to the planned 5%.
The labor force grew faster than employment
opportunities, leading to a doubling of unemployment from
around 5 million in 1956 to 10 million in 1972.
3. From the 1970s onward, the government realized
economic growth alone cannot tackle unemployment and
started employment generation and poverty alleviation
programs.

4. Despite slower employment growth in 2009-10 and 2011

-12, the unemployment rate hovered around 2% under the
usual status. The number of unemployed declined initially
but rose again to 10.8 million in 2011-12 under usual status
.

5. The fall in unemployment despite marginal employment

growth is attributed to the demographic dividend and
increased enrollment in education.

6. Underemployment is more prevalent among females and

in rural areas, measured by the difference between usual
status and current weekly status unemployment rates.

7. While economic growth has been high, it has not

translated proportionately into reduced unemployment, with
worker population ratios declining for some groups like
urban females.

8. There are significant interstate variations, with states

like Bihar, Assam, Kerala, and West Bengal having higher
unemployment rates compared to the national average.
3. GDP GROWTH RATE
The statistic shows the growth of the real gross domestic
product (GDP) in India from 2018 to 2023, with projections
up until 2028. GDP refers to the total market value of all
goods and services that are produced within a country per
year. It is an important indicator of the economic strength of
a country. Real GDP is adjusted for price changes and is
therefore regarded as a key indicator for economic growth.
In 2023, India's real gross domestic product growth was at
about 6.33 percent compared to the previous year.
The GDP growth rate compares the year-over-year (or
quarterly) change in a country’s economic output to
measure how fast an economy is growing. Usually
expressed as a percentage rate, this measure is popular
for economic policymakers because GDP growth is
thought to be closely connected to key policy targets
such as inflation and unemployment rates.

Case Study
One notable period of significant monetary policy decision
-making was post-2008 financial crisis. In response to
the crisis, central banks globally, particularly the Federal
Reserve (Fed) in the United States, enacted
unconventional monetary policies including quantitative
easing (QE) and lowering interest rates to near zero.
These measures aimed to stabilize financial markets,
boost lending, and invigorate economic growth. The
impact of these policies was multifaceted. Firstly,
lowering interest rates to near-zero levels helped reduce
borrowing costs, encouraging businesses to invest and
consumers to spend. Secondly, QE, which involved the
large-scale purchase of government bonds and other
financial assets, injected liquidity into the economy,
helping to restore confidence in the financial system.
As a result, these policies contributed to a gradual recovery
in economic growth and significant improvements in
employment rates in the years following the crisis. While the
stock markets rebounded strongly, benefiting from the low
interest rate environment and liquidity injections, concerns
emerged over potential long-term side effects, including
asset bubbles and increased inequality. Despite these
concerns, the post-2008 monetary policy actions are largely
viewed as having played a crucial role in averting a deeper
economic downturn and setting the stage for recovery.
This overview underscores the complexity of central bank
interventions during times of economic distress and their
profound impacts on not just economic indicators but also
on financial market dynamics and social outcomes

Conclusion
Monetary policy plays a pivotal role in fostering economic
stability in India, acting as a crucial tool for managing
inflation, influencing interest rates, and steering economic
growth. The Reserve Bank of India (RBI), through its adept
formulation and execution of monetary policy, has effectively
mitigated the adverse effects of both global and domestic
economic volatilities. Key findings indicate that by adjusting
policy rates, the RBI has been able to control inflationary
pressures, thereby maintaining the purchasing power of the
rupee. Furthermore, through measures such as open market
operations, the central bank has adeptly managed liquidity in
the banking system, ensuring that the economy does not
veer too far into recessionary or inflationary territories.

The implications for future policies are profound. The RBI's

strategies must continue evolving in response to both
emerging economic challenges and opportunities. Enhanced
monitoring of global economic conditions and their potential
impacts on India is essential. Additionally, the integration of
technology in monitoring and decision-making processes can
enhance the efficacy and responsiveness of monetary policy
. As India aims for sustained economic growth and greater
resilience against external shocks, the role of nuanced, data-
driven monetary policy becomes increasingly paramount.
Looking ahead, a balanced and adaptive approach will be key
in safeguarding economic stability and fostering an
environment conducive to growth and prosperity.

References

https://m.rbi.org.in//scripts/Bs_viewcontent.aspx?Id=4345

https://www.mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/ch32.pdf

https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

https://www.statista.com/statistics/263617/gross-domestic-product-gdp-growth-rate-in-india/