Economics

Monetary Policy – Meaning, Features, Objectives And Instruments

Monetary policy refers to such a policy through which a stability is established in the value of money and the supply of credit is regulated. There are no fixed and rigid principles of monetary policy rather these can be changed as per the need of a situation. The monetary policy is formulated by the government of a country in order to attain price stability, stability exchange rate, full employment etc.

The monetary policy of India is formulated by Reserve Bank in order to achieve some specific objectives. Thus, the monetary policy of India refers to a policy which is related to the regulation of the credit created by banks.

Features Of Monetary Policy

(1) Anti Inflationary : The most important feature of the Indian monetary policy is that it has always remained controlled in the context of expansion of money and credit in the country. Efforts are made to control the inflation and deflation by the monetary policy of the Reserve Bank. When the Reserve Bank feels that more credit is required for promotion of economic development, only then the credit expansion is made but in a situation of inflation, the quantity of credit is decreased and the expansion of money is also restricted.

(2) Flexibility : The second feature of monetary policy is that of flexibility. It can be changed according to the changing situations in the market. situation, when more credit is required in the market, the Reserve Bank adopts liberalized monetary policy like reduction in bank rate, cash reserve ratio, interest rate etc. As against it, to control the inflation, a contractionary monetary policy is adopted, as a result of which, the quantity of crędit is decreased.

(3) Active Policy: Before the beginning of economic planning in 1951, the monetary policy of the Reserve Bank was not active i.e. the monetary policy was not used to control and regulate the availability of credit in the economy but in 1951, the Reserve Bank started using monetary policy and adopting various methods of credit control.

(4) Various Techniques of Credit Control : Various methods are adopted by the Reserve Bank in order to control the credit. Two types of methods are used for credit control : (i) Quantitative Measures (ii) Qualitative Measures. These include bank rate, statutory liquidity ratio, open market operations, moral persuasion, direct action etc.

(5) Investment and Saving Oriented: Another feature of the monetary policy of the Reserve Bank is that it is investment and saving oriented. In order to promote the investment and the saving, more credit is provided to production sector at minimum rate of interest.

(6) Growth and Stability: The Indian economy is growing with stability. In this context, the monetary policy of the country can neither be too hard nor too liberal. So, on one hand, the Reserve Bank has a problem of providing more and more money in the market for the development. On the other hand, it is also essential to make the prices stable. Thus, sometimes, the monetary policy of the Reserve Bank becomes very liberal and at other times, it becomes very rigid.

Objectives Of Monetary Policy

(1) Stability in Prices : In India, monetary policy is mainly used as a tool of bringing stability in prices. It is essential to maintain a specific level of supply of money in order to attain price stability. Much fluctuation in price level causes a disturbance in the balance of the economy. The price level must be such that is motivating for the investors and just for the consumers. The price level can be controlled by making necessary changes in the monetary policy.

(2) Employment Opportunities: The condition of full employment in a country is a symbol of its economic development as well as optimum utilization of its natural resources. The objective of monetary policy is to attain the goal of full employment by establishing a co-ordination between demand and supply because the highest level of national income in a country can not be achieved until employment is increased.

(3) Economic Stability : The main objective of monetary policy in the developed countries is to maintain economic stability. With economic development, the demand for money also increases. The monetary authority can maintain a co-ordination between demand and supply of money by the means of an appropriate monetary policy. By doing so, it can control economic fluctuations.

(4) Promoting Sectoral Use of Funds : Under monetary policy, an effort is made to make more credit available to primary sectors like agriculture, small industries as well as weaker sections of society. Concessional rates of interest are determined for providing loans to these sectors.

(5) Encouragement to Rural Banking: Another objective of monetary policy is to encourage banking habits in rural areas. For it, special facilities are can be provided to the banks functioning in rural areas, so that rural savings can be used in productive activities.

(6) Economic Development : Through monetary policy, sufficient, resources can be made available in the developing countries. Generally, there remains a lack of resources for the development of developing countries. So, the supply of money and credit can be increased by adopting an appropriate monetary policy which can help in economic development.

Techniques/Instruments Of Monetary Policy

(A) Supply of Money : The supply of money can be defined as the currency issued by the monetary authority as well as the demand deposits of the banks. The supply of money in India is made by the ministry of finance and Reserve Bank. Not only the banking institutions must be developed rather a flexible method of note issue like minimum reserve fund should also be adopted in order to make proper arrangement of money supply in every country. It would also encourage the public for making more deposits.

(B) Rate of Interest: A major tool of monetary policy is the cost of money or rate of interest. The policy of differentiated rates of interest must be adopted in order to regulate and manage the cost of money. In every country, cheap or costly rate of interest policy must be adopted according to the situation of that country.Generally, the rate of interest must be low in the primary sectors and it must be high in the unproductive activities. The rate of interest must be increased for reducing the demand as well as prices but the rate of interest must be decreased and supply of money must be encouraged in the days of depression.

(C) Availability of Money : Availability of money refers to the control of credit. Credit control implies the change in the volume of credit as per requirement. The Reserve Bank of India, uses various techniques of credit control according to the situation. There are mainly two methods of credit control which have been explained here-under:

  1. Quantitative Credit Control
  2. Qualitative Or Selective Credit Control

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