Monetary policy is the process in which monetary authority of a country controls the supply of money in the economy. This is done by controlling interest rates in order to maintain price stability and achieve high economic growth. Monetary Policy of India is taken care and executed by Reserve Bank of India to achieve specific objectives. It refers to that policy in which central bank of the country controls the supply of money in the economy and the rate of interest.
It should be made sure and kept in mind that the banking system meets the required credit requirements and is not used for any unproductive or bad work. In developed countries the monetary policy is used for overcoming depression and inflation in the economy.
In India, financial approach of the Reserve Bank of India is tasked to deal with the amount of cash flow in the economy so they can meet the necessities of various parts of the economy and furthermore to expand the pace of monetary development.
Objectives of Monetary Policy in India
- Growth and Stability: Due to poor growth of the economy as the Monetary Policy was focused on controlling inflation. The Reserve Bank of India (RBI) adopted a new policy of growth and stability so when there is an increase in the needs of the different sectors of the economy, the RBI will provide them with sufficient credit.
- To Promote savings and Investments: By monitoring the rate of interest and checking inflation, monetary policy promotes saving and investment. Higher rates of interest promote saving and investment.
- To Achieve Price Stability: when there is a shortage of money supply there is a retard growth in the economy while an excess of it leads to inflation. As the economy develops, the demand for money increases due to the monetization of the non-monetized sector. This will lead to an increase in demand for different transactions. So now the monetary authority will have to increase the supply of money than usual to avoid inflation.
- External Stability: India’s relation with the global economy is increasing as the imports and exports are increasing rapidly. So, the Monetary authority along with the RBI influences the exchange rate.
- To Promote Employment: Concessional and generous loans are provided to sectors and entrepreneurs to help then reach their goals.
- Redistribution of Income and Wealth: As the RBI controls the inflation by supplying enough credits, it can redistribute income and wealth to the weaker and affected sections of the society.
- Infrastructure Development: It provides concessional funds and loans for the development of the different infrastructures.
Limitations of The Monetary Policy in India
1. There exist a Non-Monetized Sector
In many developing countries like India, there is an existence of non-monetized economy in large extent. People live in rural areas where many of the transactions are of the barter type, where there is mainly trading and not monetary type. Similarly, due to non-monetized sector the progress of commercial banks is not up to the mark. This creates a major setback in the implementation of the monetary policy.
2. Excess no. of Non-Banking Financial Institutions (NBFI)
When there is an economic growth and development in the economy, the financial sector rises rapidly. Because of this many Non-Banking Financial Institutions (NBFIs) are set up.
3. Unorganized Financial Markets
The financial markets help in implementing the monetary policy. As in countries like India the financial markets are of an unorganized nature and in a slow backward condition. They are mostly the money markets. In many places people like money lenders, traders, and businessman actively lend money to each other in the money lending process. But they do not come under the perspective of a monetary policy, this makes it harder for the success of a monetary policy.
4. Higher Liquidity Affects Monetary Policy
The base for deposit of many commercial banks is expanded in a rapidly growing economy so it creates excess liquidity in the system. Under this circumstance the CRR or SLR do not allow commercial banks to create any credits even if the monetary policy increases. So, when there is an existence of excess liquidity because of the high deposit base, it is not good for the implementation of the monetary policy.
5. Moneyless Economy
The Rich people, traders, businessmen and other people prefer to spend their money in a lavish way rather than to have it deposited in the bank so a large percentage of money does not come to the economy. An inflationary trend in mainstream economy is seen due to the lavish spending of money and the monetary policy too fails to control it.
6. Time Lag Effect on Success of Monetary Policy
Monetary policy can come to effect only when the policy is timely and honestly implemented by all the people. At many times when timely measures are not issued by the central bank the monetary policy is totally wiped out and is not implemented.
Conclusion
All the objectives of monetary policy are important and have their relative merits and demerits; None of these objectives is completely undesirable and should be abandoned. But the problem is that these objectives are not compatible with each other and, therefore, cannot be achieved simultaneously. No objective of monetary policy should be considered permanent and the monetary authority should keep on changing various objectives in accordance with the changing requirements of the economy. While formulating the monetary policy, some degree of compromise among the conflicting objectives is considered better than selecting only one objective and leaving all others. All the objectives of monetary policy are important and have their relative merits and demerits; None of these objectives is completely undesirable and should be abandoned. But the problem is that these objectives are not compatible with each other and, therefore, cannot be achieved simultaneously. No objective of monetary policy should be considered permanent and the monetary authority should keep on changing various objectives in accordance with the changing requirements of the economy. While formulating the monetary policy, some degree of compromise among the conflicting objectives is considered better than selecting only one objective and leaving all others
Bibliography
https://www.toppr.com/guides/business-economics-cs/money-and-banking/monetary-policy-of-india/
Click to access Monetary-Policy-in-India.pdf
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