What is Monitory Policy ?

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Monetary policy refers to the steps taken by the Reserve Bank of India to regulate the cost and supply of money and credit in order to achieve the socio-economic objectives of the economy. Monetary policy influences the supply of money the cost of money or the rate of interest and the availability of money. One of the most important functions of Reserve Bank, is to formulate and administer a monetary policy. Such a policy refers to the use of instruments of credit control by the Reserve Bank so as to regulate the amount of credit creation by the banks. It also aims at varying the cost and availability of credit with a view to influence the level of aggregate demand for goods and services in the economy.

D.C. Rowan has defined Monetary Policy ‘discretionary act undertaken by the authorities designed to influence (a) the supply of money (b) cost of money or rate of interest and (c) the availability of money”.
In India, during the planning period the basic objective of monetary policy has been to meet the requirement of the planned development of the economy. With this broad and basic objective, the monetary policy has been pursued to achieve the following objectives of the economic policy of the government of India.

One of the twin aims of the economic policy is to accelerate the process of economic growth with a view to raise the national income. The Reserve bank, has made the allocation of funds to the various sectors according to the priorities laid down in the plans and requirements of day or day development
The second objective is to control the prices and reduce the inflationary pressures in the economy. The monetary policy of the Reserve Bank during the planning period is appropriately termed as that of “Controlled expansion”. Every economy faces two conflicting interests:

(a) Expansion of money supply to finance the process of economic development.
(b) Control of money supply to check inflationary pressure generated in the economy as a result of vast development and non-development expenditure.

Thus, controlled expansion of money supply was essential for growth with reasonable.
To achieve the above mentioned objectives of the monetary policy, the Reserve Bank has adopted the following:
(a) Measures for expansion of currency and credit
(b) Measures for controlling of credit.

This article has been written by KJ Singh a MBA Graduate from a prestigious Business School In India
Article Published:February 17, 2012
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