Ask NiyaIn the economic literature, there is a near unanimity that monetary policy is a powerful instrument for improving the macroeconomic position of a country. It is regarded as an essential component of overall economic policy.
The objectives of monetary policy generally align with those of broader economic policy. The three principal goals of economic policy in India have historically been economic growth, social justice, and price stability.
Though price stability is considered the primary domain of monetary policy, it has also significantly contributed to other national objectives.
The success of designing and implementing monetary policy depends on the current economic context and various structural factors, such as the share of currency in money supply, size of the public debt, and the presence of a non-monetised sector.
Because monetary policy instruments influence broader economic objectives, identifying appropriate policy targets becomes crucial. These targets act as signals to the market and help anchor inflation expectations.
Traditionally, money supply, bank credit, and interest rates were key targets. However, more recently, reserve money—especially bank reserves—has emerged as a dominant intermediate target, supported by short-term interest rates as a supplementary operating tool.
To achieve its goals, monetary policy must deploy a range of instruments. These include open market operations, statutory liquidity ratio (SLR), cash reserve ratio (CRR), bank rate policy, interest rate policy, refinancing facilities, and other money market measures.
Balachandran (1998) observes that monetary policy is conventionally defined as encompassing the objectives, instruments, and strategies for controlling money supply and managing the cost and availability of credit in the economy.
Monetary policy is widely regarded as the defining function of a central bank. For the Reserve Bank of India (RBI), while this remained the primary focus, it also took on several developmental responsibilities in post-independence India.
The RBI’s monetary policy framework includes its objectives, targets, and instruments. These elements work together to regulate money supply and control the cost and availability of credit in the economy.
The RBI adopted a broader view of monetary policy compared to conventional central banks. This perspective included an institutional commitment to strengthening and deepening the financial sector in India.
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