The broad objectives of monetary policy in India relate to the maintenance of a reasonable degree of price stability and adequate expansion of credit to foster faster growth. However, the relative emphasis on these objectives differs because of varying socio-economic requirements and priorities, level of development, etc.
On an analysis of various macroeconomic economic parameters, such as inflation, liquidity, economic growth, industrial growth, banking development, fund inflows, the RBI adapts its key policy levers - Repo Rate, Reverse Repo Rate, and Cash Reserve Ratio (CRR) to achieve the objectives of central banking.
Historically, some of the basic concerns of monetary policy in India relate to price stability, adequacy, timeliness and cost of credit, liquidity and the external sector. In the ultimate analysis, monetary policy must be evaluated in an integrated framework in terms of the inter-relationship among money, credit, output and prices. As Mohan (2008) stressed: ‘In the final analysis, the efficacy of monetary policy has to be evaluated in terms of its success or otherwise in achieving the ultimate goals of price stability and moderation in the variability of the growth path.’
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, to attain pre-determined objectives of growth and stability. While an expansionary monetary policy increases the total supply of money, a contractionary monetary policy decreases the total money supply in the economy. Expansionary policy is traditionally used to check unemployment in a recession by lowering interest rates, while contractionary policy raises interest rates to check inflation (or cool an otherwise overheated economy).Despite several variations, monetary policy is essentially aimed at strengthening the financial system, streamlining the credit delivery mechanism and institutional improvements to support growth consistent with stability in a medium-term perspective. The Preamble of the RBI describes the basic functions ‘...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.’
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