Monetary Policy

Monetary policy intends to achieve a balance between excess and shortage of money supply in the market/economy. These policies are concerned to the supply/control of money. It influences the pace and direction of economic activity, money supplies, interest rates, borrowing and price level.

In the case of shortage of money on the economy the growth gets hampered which has negative impact on the prosperity of people. On the other hand if there is excess of money in the market, the prices of goods and services goes up and severely impacts the poor. The government/RBI needs to make sure that the sufficient money is available with market for the growth without affecting the poor.

The main objectives of monetary policy are –

Maintaining the price stability

Inflation has strong negative impact on social welfare and needs to be maintained at lower level.

High and stable employment

Employment opportunities could be increased by higher investment and economic activities, which in turn requires availability of credit at reasonable interest rates.

Economic growth

Adequate credit is required for the productive activities and hence sound monetary policy is required for supporting the growth in an economy

Stability of exchange rates

Exchange rate (amount of dollars per Rupees) is a crucial factor determining a country’s position in the international trade (import and export). Increase in the exchange rate () discourages export and enhances imports and vice versa. The current increase in exchange rate(appreciation of rupees against dollars) had a negative impact on the IT industry which is mainly based on export.

Fluctuation in exchange rates makes the planning difficult for the traders and hence monetary policy should aim on preventing any sharp fluctuation in the exchange rate.

Sectoral deployment of finds

Depending upon the priorities laid down in the plans/by government, Monetary Policy (RBI) determines the allocation of funds and interest rates among different sectors. Examples: Priority sector lending; recent move to increase interest rate on housing loans.