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| IIITA's e-Magazine |
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 Oct-Dec 2007 Vol 4 Issue 15 |
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Insight |
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| Monetary Policy
by Manish Srivastava
MBA-IT 3rd Sem, IIIT-Allahabad
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Money is an instrument that is generally acceptable as a medium of exchange and acts as a measure and store of value in a particular time period or place. The main attributes of money are it works as -Medium of exchange, Measure of value, Standard for deferred payments, Store of value
Money Supply may be defined as the total stock of value which is owned by the public (i.e. individuals and business) in the means of domestic payment .the measures of monetary aggregates used in India are -M1 (Currency with public + DD + OD),M2 ( M1 + Post Office S.B. Deposits),M3 ( M1 + Time deposits with banks),M4 ( M3 + Total Post Office Deposits)
Monetary policy is used as stabilizers and controlling tool in the economy. By using this policy a government can influence the level of spending generally government do this with the help of the central bank, monetary policy is used to control, regulate and supervise money supply in an economy. All monetary aspects of an economy are included in the; monetary policy- the level of output, level of employment, price level, inflation, deflation etc.
This process is not performing by the government at least directly. In India it is performed by the RBI. This act is performed mostly by the central bank in many countries. In its conduct of monetary policy, the RBI responds to the evolving economic activity within an articulated monetary policy framework.
Main objective of monetary policy is-
To promote economic growth for a developing country like us the most important goal for monetary policy is to increase the GNP .Supply enough credit at a concessional rate of interest to promote investment and growth. To maintain the price stability in the economy. To put control on inflation and deflation a high inflation is dangerous for any economy. Inflation is in comfort zone for India at this time. This is a good sign. Provide full employment is a big challenge, in country like India a variety of unemployment exist this is a big problem for economic development to take place. If there is a condition where full employments prevail then the interest rate become alternative. There are enough credit instruments and a suitable interest rate. Exchange rate stability is also an objective of monetary policy but this is given a low priority now.
The contradiction with all this objective is, in country like India to promote economic growth more n more money is pumped into the economy this condition leads towards inflation .Economic growth cant take place when inflation reduce the purchasing power of the people. While fulfilling the objective of full employment, promoting inflation gives a rise to inflation .There is an inverse relation ship between unemployment and inflation. Monetary policies have to make a balance between the employment and inflation.
Two types of instruments are being used to achieve the objectives.
Quantitative: Bank rate policy, Open market operations, Cash reserve ratio
Qualitative: Fixing Up the Marginal Requirements, Credit Rationing, Consumer Credit Reputation
By increasing the bank rate charges RBI discourage frequent and unnecessary borrowing by the commercial bank. Increase in the bank rate increase the borrowing interest rate as well which discourage the borrowings in the market. Less borrowing less demand factors less investment less cost of production. In open market operation the securities is buy or sell by the central bank in India by RBI. When people buy the security and pay the money it reduces the quantity of money supply when the central bank people buy and pay the money. This reduces the quantum (quantity) of money supply when the central bank buys securities, which the people dispose off it adds to the money supply.RBI can increase or decrease the CRR in the band of 3% to 15% in increase in CRR commercial banks have less money to give the loans. This also can be done by putting the change in SLR as well.
Policy making process: Traditionally, The process of monetary policy in India was been largely internal only the final outcome was available to public. Process of openness was initiated by Governor Rangarajan and further widened by Governor Jalan.
In forming the policy process apex is Governor RBI, assisted by Deputy Governors and guided by a Board of Directors. A Committee of the Board meets every week to review the monetary, economic, financial conditions and give advice or take decision appropriately. Much of the data used by the Committee for this process is available to the public.
A Financial Markets Committee and monetary policy strategic group is there first one take care of day to day operation and later one analyses strategies as this is a ongoing process .All the process is done with the consultations of the Government, mainly with the Ministry of Finance coordination is important between these two. There are many aspects while making the monetary policy as-technical, analytical, and dynamic inputs.
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