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Monetary Policy of RBI

12-NOV-2014 13:40

    What is Monetary Policy of RBI?

    The monetary policy can be defined as a regulatory policy whereby the central bank upholds its control over money supply for the comprehension of general economic goals. This notion of monetary policy may be right in the context of developed economies, however in less developed countries like India, monetary policy cannot remain restricted only to controlling money supply.

    Looking at the Reserve Bank's monetary policy in this scaffold we find that it has been intended to meet the particular requirements of developing economy of India. Appropriately summarizing the monetary policy of RBI, S.L.N. Simha has stated, "The Reserve Bank's responsibility is not merely one of credit restriction. In a growing economy there has to be a continuous expansion of money supply and bank credit and the central bank has the duty to see that lawful credit requirements are met. The Bank's responsibility in the circumstances is mainly to moderate the expansion of credit and money supply, in such a way as to ensure the legitimate requirements of industry and trade and curb the use of credit for unproductive and speculative purposes. That is why the Bank has rightly called its credit policy in recent years as one of controlled expansion.”

    Y. Venugopal Reddy has remarked, "In India, monetary policy has always emphasized the objectives of price stability and growth. What this, in effect has meant in practical policy setting is formulating a balance between the two objectives depending on the evolving situation but in the broad context of keeping the inflation rate within a reasonable bound."? Thus, as per Reddy's point of view, price stability as such cannot be the purpose of monetary policy. He emphasizes the point that the Reserve Bank of India at best should endeavor to uphold the rate of inflation within a rational limit which, according to the Chakravarty Committee should be 4%. C. Rangarajan has stated this inflation target appreciatively on various instances, "In order to ensure RBI's complete control over the supply of money and credit, it has been given exclusive power to issue currency notes. For judging how far the RBI has succeeded in achieving this objective, one has to know the relative importance of various types of money in circulation in the country”.

    In India, at present both cheques and currency notes are used for payment purposes. Coins represent a very small part of money supply in the nation & they are now used for making small payments.

    When is Monetary Policy announced?

    Traditionally, Monetary Policy is announced two times in a year - a slack season policy (April - September) & a busy season policy (October - March) in line with agricultural cycles. These cycles also overlap with the halves of financial year.

    Initially, RBI announced all its monetary measures two times in a year in the Monetary Policy & Credit Policy. The Monetary Policy has become dynamic in nature as the Reserve Bank of India reserves its right to amend it from time to time, depending on the state of economy.

    On the other hand, with the share of credit to agriculture coming down & credit towards the industry being granted whole year around, the Reserve Bank of India since 1998 - 99 has moved in for just one policy in April end. Though an evaluation of the policy does take place later in the year.

    Some terms related to Monetary Policy of RBI

    Bank Rate

    Bank rate is the minimum rate at which the central bank offers loans to the commercial banks. It is also known as the discount rate.

    Inflation

    Inflation refers to a constant rise in prices. It is a state of too much money & too few goods. Thus, due to shortage of goods & presence of numerous buyers, the prices are pushed up.

    The opposite of inflation is deflation. It is the relentless falling of prices. Reserve Bank of India can decrease the supply of money or augment interest rates to reduce inflation.

    Money Supply

    Money supply refers to the total volume of money flowing in the economy, and typically encompasses currency with the public & demand deposits (savings account + current account) with the public.

     

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