What is Monetary Policy of the RBI ?

  • Monetary policy is the macroeconomic policy laid down by the central bank. 
  • It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
  • So, it is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.
  • In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
  • The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments. 
  • Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy. Monetary policy can be expansionary and contractionary in nature. 
  • Increasing money supply and reducing interest rates indicate an expansionary policy. 
  • The reverse of this is a contractionary monetary policy.
  • For instance, liquidity is important for an economy to spur growth. 
  • To maintain liquidity, the RBI is dependent on the monetary policy. By purchasing bonds through open market operations, the RBI introduces money in the system and reduces the interest rate.
  • In India, the central monetary authority is the Reserve Bank of India (RBI). 

Important objectives of the monetary policy of India, as stated by RBI, are:

Price Stability:

  • Price Stability implies promoting economic development with considerable emphasis on price stability. 
  • The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit:

  • One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment:

  • The aim here is to increase the productivity of investment by restraining non essential fixed investment.

Restriction of Inventories and stocks:

  • Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. 
  • To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. 
  • The main objective of this policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations:

  • Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.

Desired Distribution of Credit:

  • Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. 
  • This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit:
  • The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

To Promote Efficiency:
  • It is another essential aspect where the central banks pay a lot of attention. 
  • It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity:
  • RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. 
  • It encourages more competitive environment and diversification. 
  • It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.