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What Is Monetary Policy?

What Is Monetary Policy?

What Is Monetary Policy?

The Monetary Policy In India according to which the currency authority of a country regulates the supply of money is called Monetary policy.

Its aim is to ensure economic development and economic stability of the state.

Either as monetary policy, an expansionary policy increases the overall supply of money in the economy more rapidly than normal.

And contractionary policy is known to expand or contractionary, where the money supply rises or even shrinks more slowly than usual.

The expansionary policy has traditionally been used to try to deal with unemployment in a recession by lowering interest rates in hopes that easy credit expansion will entice businesses.

The contractionary policy is intended to slow inflation to avoid consequent distortions and deterioration of asset values.


Here we will see the Objectives Of Monetary Policy in our economic growth of the country.

1. Price Stability

The need for price stability is very important for economic development as well as to stop the pace of price rise.

Under this strategy, those environmental facts are encouraged to not only be necessary for the development of architecture but also to maintain the pace of their development.

Also, understand the logical importance of price increase.

2. Control The Growth Of A Bank’s Loans

One of the important functions of the Reserve Bank of India is to reduce the loans lent without affecting production.

Also, keeping in mind the seasonal requirements and products, there is a controlled development of bank credit and money supply.

3. Promotion Of Stable Investment

The plan is to increase the productivity of investment by limiting non-urgent and fixed investment.

4. Restriction On Supply Of Goods

Units are getting sick due to the glut of products and their excess supply of a large number of goods.

In the context of this problem, the Central Monetary Authority has taken a very important decision to ban the flow of goods.

Many tasks have been done under this strategy. Such as avoiding the stock of goods and preventing sluggish currency within the organization.

5. Promotion Of Export

The monetary policy places special emphasis on promoting exports and facilitating trade. It is a self-controlled measure of monetary policy.

6. Desired Disbursement Of Loan

The Monetary Authority controls decisions related to the allocation of loans to small borrowers and the primary sector.

7. Uniform Distribution Of Credit

Under the policy of the Reserve Bank, all sectors of the economy are provided equal opportunity.

8. Promoting Efficiency

It promotes the effect of the financial system. Also establishes structural changes such as easy operation in loan disbursement system, control over interest rate hike, etc.

Apart from this, it also establishes new standards in the context of currency.

How does monetary policy affect economic growth?

The Reserve Bank of India (RBI) reviews the monetary policy every second month. Considering the state of the economy, it is decided to reduce or increase the policy interest rates.

This decision is taken by the Monetary Policy Committee (MPC) of the central bank. It has a wide impact on the economy.

Let’s know what is monetary policy and how the central bank uses it to increase and decrease cash in the economy in brief.

1. Monetary policy is the process with which the Reserve Bank controls the money supply in the economy.

2. Many objectives are met with monetary policy. These include curbing inflation, stabilizing prices and achieving the goal of sustainable economic growth. Creating employment opportunities is also one of its objectives.

3. Cash reserve ratio or open market of banks on money supply in the economy.

4. The RBI reduces interest rates in monetary policy by keeping a soft stance. This opens the way for increasing the supply of money in the economy. Increasing cash in the market increases economic activity.

5. Interest rates are raised when the central bank hardens its stance. This reduces cash in the economy.

This has the opposite effect on both production and consumption. This reduces the speed of the economy.

Instruments of Monetary Policy

There are two types of monetary policy instruments:

1. Quantitative Instruments

General or Indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal Standing Facility and Liquidity Adjustment Facility (LAF).

2. Qualitative Instruments

Selective or direct (change in margin money, direct action, moral pressure)

It is noteworthy that all the above-mentioned tools of monetary policy are used as per the requirement of the economy.

These instruments maintain the flow of money supply in the economy so that the inflation rate can be stabilized to ensure the growth of the economy.

This topic is very important for competitive examinations like UPSC and State Public Service Commissions.

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