Monetary policy is regarded as an indispensable tool of economic management. Monetary policy refers to the use of official instruments under the control of the Central Bank to regulate the availability, cost and use of money and credit. It influences the economic trends.
The Central Bank exercises its influence on the availability and cost of credit primarily by affecting the reserve position of commercial banks and through its official Discount Rate or Bank Rate policies. The efficacy of monetary policy depends on the prevailing economic situation and structural factors like,
(i) The proportion of currency in money supply.
(ii) Size of public debt.
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(iii) Non-monetized sector in the economy.
(iv) Presence of active sub-markets.
(v) The degree of imbalance in the overall supply, demand situation
(vi) Trends in agricultural and industrial production.
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(vii) General Price level, and
(viii) The balance of payment situation.
Since, these factors are constantly changing; the authorities have to adopt the right choice and mix of various techniques depending upon the circumstances. Monetary policy also encompasses institutional changes in the banking and credit structure.
In the developing countries, the Central Banks have been called upon to play a positive and energetic role in administering monetary policy to achieve the desired economic goods.
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Objective of Monetary Policy
‘Growth with Price stability’ is the main theme of Reserve Bank of India with regard to its monetary policy. In modern times, the main objective of monetary policy is the promotion of economic growth of the country with price stability.
The Central Bank plays an active and pre eminent role in achieving the objectives of monetary policy. The basic objectives of the monetary policy are as follows :
(i) Achieving the optimum level of output
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(ii) Increasing employment opportunities
(iii) Price stabilization
(iv) Maintaining equilibrium in balance of payments
(v) Ensure adequate level of liquidity
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(vi) Fullest possible utilization of available resources
(vii) Exchange stabilization
(viii) Monetary integration of the country
(ix) Directing credit flow according to policy priorities.
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(x) Assisting in mobilization of savings in the community
(xi) Promotion of capital formation, and
(xii) Support the authorities in the allocation of resources,
(xiii) Targeting of reasonable interest rate for growth of industry.
By achieving the above said objectives the Central Bank takes necessary steps to direct the banking and other financial institutions. Through these objectives of the monetary policy various benefits can be obtained. They are,
(i) The cyclical fluctuations in output and prices can be eliminated.
(ii) The price stability can be ensured.
(iii) The economic prosperity can be achieved.
(iv) Regional imbalances and disparities can be avoided.
(v) The effective monetary policy stimulates production.
(vi) It encourages capital formation and mobilizes savings.
(vii) It promotes business efficiency and thereby its prosperity.
(viii) It corrects the disequilibrium in the balance of payments.
(ix) It ensures exchange stability
(x) Promotes better economic relationship among countries.
(xi) Maintaining the stability in price level and thereby maintains the internal value of money.
(xii) Effective monetary policy promotes foreign trade..
(xiii) The employment opportunities can be expanded at a considerable extent.
(xiv) Increases the standard of living of the people by benefiting the consumers through price stability.
(xv) It promotes the economic welfare of the country as a whole.
Thus, the monetary policy is the main stay of the economic developments of any country. In a planned economy, it plays a crucial role.