Monetary policy is an important economic tool which is used to attain many macroeconomic goals.
Introduction, Objectives and Limitations of Monetary Policy
Introduction
Monetary policy is an important
economic tool which is used to attain many macroeconomic goals. Monetary policy
regulates the supply of money and availability of credit in the economy. It
deals with both the lending and borrowing rates of interest of commercial
banks. It aims to maintain price stability, full employment and economic
growth. Reserve Bank of India (RBI) is responsible for formulating and
implementing monetary policy of India. It was announced twice a year (slack
season and busy season) but now once in a year. It refers to the credit control
measures adopted by the central bank of a country. The efforts of monetary
authorities to increase the benefits of existing monetary system and to reduce
the disabilities in the process of economic development and growth can be
called the monetary policy of the country.
Objectives
Of Monetary Policy Of India:
1. To
achieve Price stability 2. To attain
Exchange rate stability 3. To avoid
the negative impacts of business cycle 4. To
experience full employment position Instruments:
The major instruments used to achieve the above
said objectives are Bank
rate: The rate of interest charged by
the RBI against the commercial bank
borrowings. If RBI increases the bank rate from 2% to 3% then the commercial
banks rate of interests will go up from for example 7% to 10% which in turn
reduce the public borrowings due to higher interests and minimize the money
circulation in the country. Reserve
ratio: CRR (Cash Reserve Ratio), SLR
(statutory Liquidity Ratio) the RBI
insist on commercial banks to keep a certain percentage as reserve in their
hands for ensuring liquidity and regulating credit. The RBI can increase the
CRR from 3% to 15%. In case when the RBI increases CRR from 10% to 12% then the availability of money in
the hands of banks will come down. Thus the credit creating capacity of the
commercial banks will be reduced and money supply in the market also will be
regulated. Open
market operation: RBI selling the government
securities to the public. In that
case instead of having money in the hands the public will receive certificates
for a fixed time period and they will receive interest against the same. But
the money circulation among the public will be reduced. Margin
requirements: Margin requirement for mortgaging
against the loans will be increased
to reduce to credit and it will be reduced to increase the credit flow. Credit
rationing: The loans and advances are
provided only for production purpose
and for essential activities to cut down the money in circulation. Moral
suasion: RBI controls the commercial banks
for creating loans and advances by
persuasion through issue of circular. Direct
actions: Sometimes RBI takes direct action
against the credit created by the
banks in contravention of the RBI guide line to overcome the inflationary
situation. Limitations Of Monetary
Policy:
1. Monetary
policy operates in a broad front 2. Success
and failure depends on the banking system of the country 3. It has
Institutional restrictions 4. Unorganized
money market does not support the monetary policy 5. Existence
of non monetized sector also defies RBI’s regulation 6. It is not
very effective in overcoming depression.
Tags : Managerial Economics - Monetary Policy
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