Report: Monetary Policy and Its Impact on the Indian Economy
By AARUSH GADANAYAK (240231004045)
1. Introduction
Monetary policy is a macroeconomic lever very important to the hands of central banks in
conducting money supplies and interest rates in a country that could have twin objectives of
stabilizing the economy while simultaneously achieving its growth pattern. The monetary
policy of India is framed and implemented by the Reserve Bank of India, which is assisted
with a mixture of policy rates and monetary instruments or measures to control inflation,
employment, and the overall economic environment.
This report finds the impact of monetary policy on the Indian economy by focusing on the
relationship between monetary tools and key economic variables, such as Gross Domestic
Product (GDP), inflation, Foreign Direct Investment (FDI), and unemployment.
2. Types of Monetary Policy
Expansionary Monetary Policy (EMP): Such a policy expands money supply to stimulate
growth in the economy, especially during recessive periods. However, its risks are increased
inflation.
•CMP: CMP reduces the money supply by raising the rate of interest, primarily for inflation
control.
3. Instruments of Monetary Policy
RBI uses various instruments for monetary policy handling:
•Repo Rate: It is the rate at which RBI borrows money to commercial banks. Lowering the
rate increases borrowing and a hike in the rate aids the controlling of inflation.
•Reverse Repo Rate: This is the rate at which the RBI withdraws funds from commercial
banks by borrowing it to absorb excess liquidity.
•Cash Reserve Ratio (CRR): This is the minimum amount of reserves a bank needs to keep
with the RBI.
Footer 1
•Statutory Liquidity Ratio (SLR): A percentage of the net demand and time liabilities a bank
should maintain, in terms of cash, gold, or government-approved securities.
•Open Market Operations (OMO): Sale or purchase of government securities in the open
market to influence liquidity.
4. Effect on Important Economic Variables
•GDP: As the repo and reverse repo rates according to the report strongly have a push upon
GDP of India, low rates increase economic activities through increased investments and
expenditure .
•Another important objective of the monetary policy is to control the rate of inflation. At a
high level of inflation, the interest rate is raised in order to reduce spending, and at a deflation
level, lower interest rates are used in order to increase spending.
•Foreign Direct Investment (FDI): The relationship between monetary policy and FDI is not
all that direct; however, stable and controlled inflation rate may create the right and desirable
interest environment in front of foreign investors .
•Unemployment: The more effective monetary policy can be in reducing unemployment, the
better the scheme is geared to promoting economic activity. Expansionary policies during
recession can benefit reduce unemployment since it stimulates business investment .
Indian Monetary Policy and Recent Trends
The Indian economy has experienced increased shocks since the global financial crisis in
2008 and more recently due to demonetization in 2016 and GST in 2017. The RBI countered
with both expansionary and contractionary policies from time to time to stabilize the
economy. India's GDP growth recovered during 2009-10 with policy rate cuts, increasing
capital inflows.
6. Conclusion
Monetary policy is still a great tool to determine India's economic direction. Controlling the
money supply, inflation, and interest rate remains within the RBI's purview. Such control will
ensure that India can respond effectively to various kinds of domestic and international
economic challenges. Yet, the ongoing liberalization of the financial market requires the
Footer 2
mechanism of transmitting monetary conditions to challenge newer difficulties for ensuring
sustained economic growth and stability to sustain itself.
Footer 3
