Monetary Policy

Definition
It is the process by which monetary authority of a country controls the supply of money often targeting a rate of interest for the purpose of promoting economic growth & stability.

Objectives
To maintain price stability and ensure adequate flow of credit to productive sectors of the economy. Stability for national currency(considering prevailing economic conditions) Growth in employment & income

Who makes it?

RBI announces norms for the banking and financial sector and the institutions which are governed by it. These would be banks, financial institutions, nonbanking financial institutions, primary dealers (money markets) and dealers in the foreign exchange (forex) market

When is the monetary policy announced?

It is announced twice a year- a slack season policy (April-Sept) and a busy season policy (Oct-March) according to agricultural cycles. It is dynamic in nature as RBI reserves the right to alter it from time to time depending to the state of the economy. Since 98-99 RBI has moved in for just one policy in April end. But review takes place later in the year.

Types of monetary policy

1)Expansionary policy- increases the total supply of money in the economy, It is traditionally used to combat unemployment in a recession by lowering interest rates. 2)Contractionary policy-decreases the total money supply. It involves raising interest rates in order to combat inflation.