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Money and Banking part 06
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Monetory Policy - Definition, Objectives and Role.

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  2. MONETARY POLICY BY RBI 1. Monetary policy or credit policy means controlling the availability , usage and circulation of money and credit in an economy It is the process under which the central monetory authority of the country, usually the central bank monitors the credit requirement in an economy by the use of different instruments. The Reserve Bank of India is the central bank of the country and it regulates the monetary policy of India. 2. 3.

  3. DEFINITION A policy employing the central bank controls of the money supply as an instrument for achieving the objective general economic policy is a monetary policy - By Prof. Harry J

  4. OBJECTIVES 1. Rapid economic growth 2. Price stability 3. Exchange rate stability 4. Full employment 5. Neutrality of money 6. Equal income distribution 7. Balance of payment equilibrium

  5. ROLE OF MONETAR Y POLICY The monetary policy differs from country to country depending upon its level of development. A developing country's monetary policy will be different from that of a developed country The monetary policy of a developed country will be full employment, price stability or exchange rate stability The monetary policy of a developing country will be to create suitable situations for its economic growth 1. 2. 3.

  6. In a developing country, it has the following role. 1. DEVELOPMENTAL ROLE : In a developing economy, the most important requirement is the economic growth of the economy. The main aim is to create such situation that influences the supply and demand of credit, controlling inflation and maintaining the balance of payments.

  7. 2. PRICE STABILITY Monetary policy helps to keeps a check on the supply and demand of money in an economy, If there is an imbalance between the two, it will lead to a change in the price level. A shortage of money supply will retard the growth and excess of money supply will lead to inflation. 3. Interest rate policy: A higher interest rate policy acts as an incentive to higher savings, develops banking habits and speeds up the monetization of the economy.

  8. 4. BRIDGES BALANCE OF PAYMENT DEFICIT: Developing countries have to import capital goods, machinery, raw materials etc to develop infrastructure such as power, irrigation, transport etc. This leads to a negative BOP situation. Monetary policy in the form of interest rate policy helps to bridge this difference. 5. DEBT MANAGEMENT: The main aim of this role is to increase public borrowing every year, This is important in a developing country to finance development programs.

  9. 6. CREATING BANKING INSTITUTIONS: The monetary authority encourages banks to establish branches in rural areas. This helps to monetize the npn monetized areas and encourage saving and investment for capital formation. Thus an appropriate monetary policy, as outlined above, helps in controlling inflation, bridging balance of payments gap, encouraging capital formation and promoting economic growth.