Monetary Policy

Monetary Policy

• The main measures of monetary policy are control of the money supply, credit and interest rates.

• The monetary policy statement in India is announced by the Reserve Bank of India. It specifies the measures that the RBI intends to take to influence such key factors as money supply, interest rates and inflation so as to ensure price stability.

• It also lays down norms for financial institutions like banks. It relates to matters like cash reserve ratio, capital adequacy etc.

Objectives of Monetary Policy

1. Controlled Expansion of Money: This looks after meeting the needs of production and trade and at the same time moderating the growth of money supply to contain the inflationary pressures

2. Sectoral Deployment of Funds: The RBI has determined the allocation of funds as also the interest rates among different sectors. The sectors which have received special attention are core sectors (coal, iron & steel etc), foodgrains, agriculture, small-scale industry etc.

How the Monetary Policy Works?

• The authorities may seek to influence interest rates generally. If the supply of money relative to demand is reduced, the authorities can raise the price of money, i.e. interest rate, with a view to deterring borrowing in general.

• Moreover the authorities can intervene directly to impose an official interest rate that in turn determines all other interest rates.

Difficulties Faced in Money Supply Control-1

• As a result of financial innovation outside the traditional banking system there are limits to regulation of money supply.

1. E.g. this may take the form of credit cards by retail stores which leads