Monetary policy of India - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali PDF Download

Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI) is so designed as to maintain the price stability in the economy.

Other objectives of the monetary policy of India, as stated by RBI, are:

Price Stability

Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non essential fixed investment.

Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.

Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit

The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

To Promote Efficiency 

Monetary operations

Monetary operations involve monetary techniques which operate on monetary magnitudes such   as money  supply,interest rates and   availability of credit aimed  to maintain Price Stability, Stable    exchange    rate,    Healthy Balance    of    Payment,    Financial stability, Economic growth. RBI, the apex    institute of India which monitors and    regulates the monetary policy of the country stabilizes the price by controlling Inflation.    RBI takes into account the following monetary policies:

Major Operations

Open Market Operations

An open market operation is an instrument of monetary policy which involv es buying or selling of government securities from or to the public and banks. This mechanis m influencesthe reserve position of the banks, yield on government securities and cost of  bank credit.
The RBI sells government secu rities to contract the flow of credit and buys governmentsecurities to increase credit flow . Open market operation makes bank rate policy effectiveand maintains stability in government securities market. 

Cash Reserve Ratio
Cash Reserve Ratio is a certain percentageof bank deposits which b anks are required tokeep with RBI in the form of reserves or balances .Higher the CR R with the RBI lowerwill be the liquidity in t he system and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of November 2012, the CRR is 4.25 percent.[3]
  

Statutory Liquidity Ratio    
Every financial institute have to maintain a certain a mount of liquid assets from their time and demand liabilities with the RBI. These liquid assets can be ca sh, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is term ed as StatutoryLiquidity Ratio.There was a re duction from 38.5% to 25% because of the suggestion by Narshimam Committee. The current SLR is 23%.

Bank Rate Policy