Money and Banking

Monetary Policy of India

In general terms, the Monetary Policy of a country is a regulatory policy which enables the central bank or monetary authority of the country to control the supply of money, availability of bank credit, and the cost of money (or rate of interest). In this article, we will look at the objectives of the monetary policy in India.

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Monetary Policy in India

In India, the Monetary Policy is an important tool for the economic management of the country. The Reserve Bank of India (RBI) is the central bank of the monetary authority of India. it controls the supply of money and bank credit.

It is responsible for ensuring that the banking system meets the legitimate credit requirements and not for unproductive or speculative reasons.

Objectives of the Monetary Policy in India

‘Growth with Stability’ is the backbone of the monetary policy in India. The policy helps in the regulation of the availability, cost, and use of money. Here are the primary objectives of the monetary policy in India:

monetary policy in India

                                                                                                                                      Source: Pixabay

Growth with Stability

Traditionally, the monetary policy in India was focused on controlling inflation. This was done through the contraction of money supply and credit. However, this resulted in poor growth of the economy.

Therefore, RBI adopted a new policy of growth with stability. In simple terms, this means that the RBI will provide sufficient credit for the increasing needs of the different sectors of the economy. Also, it will control inflation within a certain limit.

Regulation, Supervision, and Development of Financial Stability

Financial stability is the ability of an economy to absorb shocks and ensure that people retain confidence in the financial system of the country. Internal and External shocks can threaten the financial stability of a country and destabilize its financial system.

Therefore, the RBI gives a lot of importance to maintaining confidence in the country’s financial system through adequate regulation and controls. It also ensures that the objective of growth is not sacrificed. Therefore, we can say that the RBI focuses on the regulation, supervision, and development of financial stability.

Promoting Priority Sector

In India, the priority sector includes agriculture, export, small-scale enterprises, and the weaker section of the population. RBI consistently ensures that the banking system provides timely and adequate credit to these sections at affordable costs.

Employment Generation

The monetary policy of a country can influence the rate of investment and its allocation among the different economic activities of the country with varying labor intensities. Therefore, it helps in employment generation.

External Stability

As the imports and exports are increasing, India’s linkages with the global economy are getting stronger. Traditionally, the RBI determined the exchange rate and also controlled the foreign exchange market.

However, now RBI only has indirect control over external stability through managed flexibility. Through this mechanism, the RBI influences the exchange rate by buying or selling foreign currencies in the open market.

Encouraging Savings and Investments

In order to encourage people to save, the RBI offers attractive interest rates. Further, a high saving rate leads to investment.

Therefore, the monetary management via influencing interest rates can mobilize savings and thereby investments in the country.

Redistribution of Income and Wealth

Since the RBI controls inflation and deploys affordable credit to the weaker sections of the society, it can redistribute income and wealth to the weaker sections of the economy.

Regulation of NBFIs

NBFIs or Non-Banking Financial Institutions like IDBI, UTI, IFCI, etc. play an important role in the Indian economy. They help in the deployment of credit and also the mobilization of savings.

RBI does not directly control the functioning of these institutions. However, through the monetary policy, it can indirectly influence the policies and functions of the NBFIs.

Solved Question

Q1. List the primary objectives of the monetary policy in India.

Answer: The primary objectives of the monetary policy in India are:

  1. Growth with Stability
  2. Regulation, Supervision, and also Development of Financial Stability
  3. Promoting Priority Sector
  4. Generation of Employment
  5. External Stability
  6. Encouraging Savings as well as Investments
  7. Redistribution of Income and Wealth
  8. Regulation of NBFIs
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