Monetary Policy of India – Everything You
Should Know About
Why should a country need a monetary policy? Who makes it? What is the
purpose of monetary policy? What are the instruments used for it?
In this article, let’s learn and understand all major concepts associated with
the monetary policy of India.
What is meant by Monetary Policy?
Monetary policy refers to the policy of the central bank – ie Reserve Bank of
India – in matters of interest rates, money supply and availability of credit.
It is through monetary policy, RBI controls inflation in the country.
RBI uses various monetary instruments like REPO rate, Reverse RERO rate,
SLR, CRR etc to achieve its purpose. (This is explained well in one of our
earlier articles – basics of economy concepts).
In short, Monetary policy refers to the use of monetary instruments under
the control of the central bank to regulate magnitudes such as interest
rates, money supply and availability of credit with a view to achieving the
ultimate objective of economic policy.
Expansionary and Contractionary Monetary Policy
We have already seen that monetary policy refers to the actions undertaken
by a nation’s central bank to control the money supply. Control of money
supply helps to manage inflation or deflation.
The monetary policy can be expansionary or contractionary.
, An expansionary monetary policy is focused on expanding (increasing) the
money supply in an economy. An expansionary monetary policy is
implemented by lowering key interest rates thus increasing market
liquidity.
A contractionary monetary policy is focused on contracting (decreasing)
the money supply in an economy. A contractionary monetary policy is
implemented by increasing key interest rates thus reducing market
liquidity.
How does the Reserve Bank of India get its mandate to
conduct monetary policy?
The Reserve Bank of India (RBI) is vested with the responsibility of
conducting monetary policy. This responsibility is explicitly mandated
under the Reserve Bank of India Act, 1934.
Recently there were many changes in the way Monetary Policy of India was
formed – with the introduction of the Monetary Policy Framework (MPF),
Monetary Policy Committee (MPC), and Monetary Policy Process (MPP).
We shall see each of these terms in detail soon.
What is the main goal of the Monetary Policy of India?
Maintain price stability.
The primary objective of monetary policy is to maintain price stability while
keeping in mind the objective of growth. Price stability is a necessary
precondition for sustainable growth.
To maintain price stability, inflation needs to be controlled. The government
of India sets an inflation target for every five years. RBI has an important
role in the consultation process regarding inflation targeting. The current
inflation-targeting framework in India is flexible in nature.
Flexible Inflation Targeting Framework (FITF)
Should Know About
Why should a country need a monetary policy? Who makes it? What is the
purpose of monetary policy? What are the instruments used for it?
In this article, let’s learn and understand all major concepts associated with
the monetary policy of India.
What is meant by Monetary Policy?
Monetary policy refers to the policy of the central bank – ie Reserve Bank of
India – in matters of interest rates, money supply and availability of credit.
It is through monetary policy, RBI controls inflation in the country.
RBI uses various monetary instruments like REPO rate, Reverse RERO rate,
SLR, CRR etc to achieve its purpose. (This is explained well in one of our
earlier articles – basics of economy concepts).
In short, Monetary policy refers to the use of monetary instruments under
the control of the central bank to regulate magnitudes such as interest
rates, money supply and availability of credit with a view to achieving the
ultimate objective of economic policy.
Expansionary and Contractionary Monetary Policy
We have already seen that monetary policy refers to the actions undertaken
by a nation’s central bank to control the money supply. Control of money
supply helps to manage inflation or deflation.
The monetary policy can be expansionary or contractionary.
, An expansionary monetary policy is focused on expanding (increasing) the
money supply in an economy. An expansionary monetary policy is
implemented by lowering key interest rates thus increasing market
liquidity.
A contractionary monetary policy is focused on contracting (decreasing)
the money supply in an economy. A contractionary monetary policy is
implemented by increasing key interest rates thus reducing market
liquidity.
How does the Reserve Bank of India get its mandate to
conduct monetary policy?
The Reserve Bank of India (RBI) is vested with the responsibility of
conducting monetary policy. This responsibility is explicitly mandated
under the Reserve Bank of India Act, 1934.
Recently there were many changes in the way Monetary Policy of India was
formed – with the introduction of the Monetary Policy Framework (MPF),
Monetary Policy Committee (MPC), and Monetary Policy Process (MPP).
We shall see each of these terms in detail soon.
What is the main goal of the Monetary Policy of India?
Maintain price stability.
The primary objective of monetary policy is to maintain price stability while
keeping in mind the objective of growth. Price stability is a necessary
precondition for sustainable growth.
To maintain price stability, inflation needs to be controlled. The government
of India sets an inflation target for every five years. RBI has an important
role in the consultation process regarding inflation targeting. The current
inflation-targeting framework in India is flexible in nature.
Flexible Inflation Targeting Framework (FITF)
