Monetary Policy

One of the principal institutions that ensure economic and financial stability in the country is Central Bank. It is the apex institution in any country and plays a significant role in the functioning of an economy. In any country, an important financial institution is the Bank. Banks play an essential role in the proper functioning of the financial society. Banks lend out money to its customer and ask for an interest amount to be paid while returning the principal amount of the loan. Hence, this is one of the reasons why the customers must have faith in the Banks and the Banks must guarantee security. 

Every institution requires some regulations and rules that control its actions. Without regulations and rules, the Bank system of a country is open to economic shocks and loss. In the financial world, Banks are regulated by the policies put forward by the Central Bank of the respective country. The world monetary policies help the banks in promoting their credit system, and the total money flows in the country. The principal aim of these policies is to set a rate at which the economy will prevail in a balanced manner. Since, people are rate oriented, as soon as the rates increase or decrease the preference of the customer changes likewise. 

 Let us discuss some of these Monetary Policies.

Instruments of Monetary Policies 

There are various Monetary policies formulated by the Central Bank of an economy. 

• Discount Rate: Central Banks lend money to the commercial bank for a long period at this rate. 

• Repurchase Rate: Central Banks lend money to the commercial bank for a short period at this rate.
• Reverse Repo Rate: The central banks accept deposits from commercial banks at this rate.
• Open Market Operations: These operate the buying and selling of short-term bonds in the Market. 
• Legal Reserve Ratio: These ratios indicate that commercial banks must maintain a reserve. These ratios include- Cash Reserve Ratios and Statutory Liquidity ratios. 

The above-mentioned instruments are the Quantitative Methods of controlling credits by the Central Banks. These methods aim at the total flow of credit in the economy. 

There are other methods, which are put under the head- The qualitative Method. This method aims at the direction of the Credit. These methods include-

• Margin Requirements: The contrast between the loan amount and the securities market value against the loan is the Margin. 
• Moral Suasion: The commercial banks are pleaded or requested by the central bank for not advancing credits for non-essential activities. 
• Selective Credit Control: Through this method, Central Bank instructs the commercial bank to provide (or, not) credit to particular sectors. 

The increase or decrease in these instruments helps in correcting Deficient and Excess Demands in the economy. 

Types of Monetary Policies

There are two types of Monetary Policies:

• Expansionary Monetary Policy: When the aggregate demand and the growth of the economy increases, then expansionary monetary policies are used. These policies include raising the money supply in the economy. The monetary policies are adjusted according to the growth in the economy. The government monetary authorities often decrease the interest rates- based on the needs and requirements of the economy.  
• Contractionary Monetary Policy: When the economy faces the conditions of inflation, then the contractionary monetary policy is used. These policies restrict the liquidity rate. It reduces the flow of money supply in the economy. 

Let us discuss some of the objectives of the financial world monetary policy measures taken up by the Government.

Objective

Some of the objectives of the financial world Monetary policy measures include the following- 

• One of the principal objectives of Monetary policies is Price Stability. This helps in making the environment favorable for developmental projects in the country. 
• Through the various instruments of the monetary policy by the Central Bank, the money supply and bank credits increase in the economy. In addition, the distribution of these credit amounts is equal. 
• The productivity of investments expands in the country.
• The monetary policies help in increasing the efficiency of the financial system in the country and incorporate other favorable structural changes. 
• These policies help increase the competition and diversification in the country. 
• Monetary policies also help in expanding exports and balancing trade in the country. 
• These are the measure through which the central bank makes provisions to avoid over-stocking and increases the flow of money in the economy.

Conclusion 

Banks are regulated by the policies put forward by the Central Bank of the respective country through monetary policies. The world monetary policies help the banks in promoting their credit system, and the total money flows in the country. Expansionary Monetary policies and Contractionary monetary policies are the types of Monetary policies. The central uses two methods to implement the monetary policies- quantitative and qualitative methods. The qualitative method aims at the direction of the Credit. These methods include- Margin Requirements, Moral suasion, and Selective credit control. Quantitative methods aim at the total flow of credit in the economy. These methods are- Repo and reverse repo rate, Bank rate, Open Market Operations, and Legal Reserve ratios. All these instruments play an essential role in the conditioning of the commercial banks, in the hands of the Central Bank.