Monetary policy

It is an important economic tool for achieving the economic goals of a nation. It is generally laid down and operated by the central bank of the country in consultation with the government. In our country, monetary policy is determined and operated by Reserve Bank of India.

Monetary policy plays an important role in moulding the economic character of a country. A properly conceived monetary policy can facilitate to a great extent the economic growth of a country by adjusting the money supply to the needs of growth by directing the flow of funds into the desired productive channels. It can also help in correcting economic ills of the economy such as inflation, the supply of money and credit.

Objectives of Monetary Policy – The objectives of monetary policy of a country may depend upon its economic environment. In an advanced country, monetary policy concentrates more on the regularatory aspect, which means control of credit to achieve the goal of economic stabilization and to avoid hyper-imflation while in a developing country, monetary policy aims at controlled growth of the economy through expansion of credit and encouragement of savings.

The main or broad objectives of monetary policy, which are discussed below-

1. To mobilize saving imto productive channels of the economy.
2. To promote savings and tap potential savings.
3. To curb inflationary trends in the country.
4. To provide incentives for investments in priority areas.
5. To provide credit to cater to the growing needs of trade, agriculture, commerce, and industry and thus, promote overall economic growth.
6. To increase the level of employment.

Thus, in a developing country, the monetary policy should include both promotional and regulatory aspects. The promotional aspect deals with the adequate incentives for saving and investments. The regulatory aspect deals with regulation of inflationary impact of credit expansion.