ECONOMIC STABILIZATION AND MONETARY POLICY

MEASURES: AN ANALYSIS

Submitted to:

Dr. Eritriya Roy

Asst. Professor, Economics

Submitted by:

Amartya Bajpai

B.A.LL.B.(Hons.)

Sem-I, Sec-B, Roll No.-20

Date of Submission:

Hidayatullah National Law University

Uparwara Post, Naya Raipur -492002 (C.G.)

 DECLARATION

I hereby declare that the project work titled “Economic Stabilization and Monetary Policy
Measures: An Analysis” is my own work and represents my own ideas and where others’
ideas or words have been included, I have adequately cited and referenced the original
sources. I also declare that I have adhered to all principles of academic honesty and integrity
and not misrepresented or fabricated or falsified any idea/data/fact/source in my submission.

Amartya Bajpai

Semester-I

B.A.LL.B.(Hons.)

Section- B

Roll No.-20

I
 ACKNOWLEDGMENT

The practical realisation of this project has obligated the assistance of many people. I express
my deepest regard and gratitude for Dr. Eritriya Roy Ma’am. Her consistent supervision,
constant inspiration and invaluable guidance have been of immense help in understanding
and carrying out the nuances of the project report.

I would like to thank my family and friends, without their support and encouragement, this
project would not have been a reality.

I would take this opportunity to also thank the University and the Vice Chancellor for
providing extensive database resources in the Library and through Internet. I would be
grateful to receive comments and suggestions to further improve this project report.

I feel highly elated to work on the topic “Economic Stabilization and Monetary Policy
Measures: An Analysis.”

Amartya Bajpai

Semester-I

B.A.LL.B.(Hons.)

Section- B

Roll No.-20

II
 TABLE OF CONTENTS

DECLARATION........................................................................................................................I

ACKNOWLEDGMENT...........................................................................................................II

TABLE OF CONTENTS.........................................................................................................III

INTRODUCTION......................................................................................................................1

OBJECTIVES OF THE STUDY...............................................................................................4

RESEARCH METHODOLOGY...............................................................................................4

SCOPE OF STUDY...................................................................................................................4

Chapter-1 Monetary Policy Regulation.....................................................................................5

Chapter-2 Objectives of Monetary Policy..................................................................................8

Chapter-3 Economic Stabilisation..............................................................................................9

Chapter-4 Economic Stabilisation in India..............................................................................11

Chapter-5 Monetary Policy of India........................................................................................13

Conclusion................................................................................................................................15

References................................................................................................................................17

III
 INTRODUCTION

A policy is a course of action taken by an organisation or a state to deal with the

circumstances prevailing to achieve the desired outcome. They make up the base for decision
making both subjectively and objectively. However, policies guide our
behaviour or decision making and they don’t have the force of law.

There are various steps involved in policy making, some of them are as follows:

1. Identification of the agenda/issue.

2. Identification of desired outcomes.
3. Policy formulation.
4. Deliberation.
5. Amendments to the policy (if needed).
6. Decision Making.
7. Implementation.
8. Evaluation.

The last step “Evaluation” is not only the task of the organisation but also analysists within
those affected and unaffected, for further improvements to the shortcomings prevailing in the
current policy. Generally, policy comes under the wide scope of Political Science but many
specific policies are studied under their own fields. For example, Monetary policy is studied
under Economics.

The policies can be of various types depending upon the desired set of goals. Some of these
are Public policies, Defence policies, Economic policies, Distributive policies, etc. The
subject matter of this project is related to Economic Policies.

Economic Policies are the policies undertaken by the state or the government for the intent of
making government budgets (Annual Financial Statement), levels of taxation, money supply,
labour market among various other aspects of the economy which the government deals with.
The goal of these policies is generally to enable growth in employment, development of
businesses (both private and public), stabilise the market and thereby the economy, ensure
and promote economic well-being. The above-mentioned goals are common in most of the
economies but there are countries with specific goals as well . These goals depend on the

1
state of economy, nature of government, education standards and level of people. For
example, a socialist nation (Cuba) would prefer most of the businesses to be state-run
whereas a capitalist (USA) one would prefer most of the businesses to be private-owned.

Economic Policy can further be sub-divided mainly into two parts:

1. Fiscal Policy.
2. Monetary Policy.

The word fiscal finds it origin in the Latin word “fiscus” also known as “fiscalis” which
literally means purse or treasury. Meaning of the word fiscal is anything relating to
government expenses like taxation, defence acquisition. This policy is formed by the
government or the state and has no specific target to meet other than economic growth of a
country. The Budget or the Annual Financial Statement is a part of this policy. So, evidently
transformation/ changes in tax rates, change in spending in various sectors by the
government, the borrowings of the government, etc. are a part of this part of economic policy.
They are generally based on the principles of Keynesian economics which roughly theorises
that a state or a government can influence macroeconomic productivity levels by changing
tax rates or/and public spending.

Monetary policy as the word itself suggests is related to money or the currency at hand of the
people. These policies are made by the central banks of the respective countries, in the case
of India, it is the Reserve Bank of India (RBI). The goals or desires of this policy is to
influence the supply of money in an economy and setting base interest rates for various
institutions, for itself and the government, which are further targeted to achieve control in the
levels of inflation, consumption, growth and liquidity of cash. It is formulated by the
Monetary Policy Committee of the RBI (discussed further in Chapter 1). It includes various
measures like Open market operations, credit control, bank rate policies and many others.
Using any of the above-mentioned measures, the RBI can control money supply in the
economy. Monetary policy can broadly be categorised into two: 1. Expansionary.

2. Contractionary.

2
Expansionary monetary policy can be observed when the money supply is being increased
and the interest rates are being decreased. Whereas, the opposite of this generally indicated
contractionary monetary policy. It increases liquidity to create or promote economic growth
and reduces liquidity in order to control inflation.

Consumer Price Index is a measure that examines the estimated price changes in the purview
of consumer goods and services on which most of the marketplace is based at ground level. It
is calculated by Ministry of Statistics and Planning Implementation on the basis of the
surveys which it conducts in order to have an abstract idea of the situations prevailing. This is
only an estimation as keeping a track of every nook and corner of the country is impossible
so on the basis of average the survey is completed.

One of the targets of both these policies is economic stabilization (discussed in detail in
Chapter-3). Thus, they need to go hand-in-hand with each other to receive the best possible
result.

The main focus of this project is to discuss in detail the monetary policy, economic
stabilisation and the measures taken to ensure it.

3
 OBJECTIVES OF THE STUDY

1. To discuss the measures undertaken by RBI to regulate the monetary policy.

2. To study the objectives of monetary policy.
3. To study the concept of economic stabilisation.
4. To discuss further about the monetary policy of India.

RESEARCH METHODOLOGY

The project is of descriptive and non-empirical in nature and employs secondary mode of
data collection as the data is collected from books, journals, articles, etc.

SCOPE OF STUDY

The scope of the study is limited to the subject matter of Economics only. The factors and
terms associated with the same should be interpreted according to Economics only.

4
 Chapter-1 Monetary Policy Regulation

The Reserve Bank of India was set-up under the Reserve Bank of India Act,1934 (RBI Act)
and commenced its operations on 1st April,1935 at the then headquarters in Calcutta (Kolkata)
and later shifted to the present headquarters in the financial capital of India, Mumbai (known
as Bombay back then). The RBI Act, was formed on the basis of the recommendations of the
Hilton-Young commission. It has a complete control over the supply of currency in the
country. It has set-up various mints across the country in order to print notes and produce
coins. It is controlled by the central board of directors, headed by the governor of RBI, not
more than 4 deputy governors, two officials from Ministry of Finance and ten others from a
score of other fields.

The policy of the RBI in the initial years of independent India, was focussed on the
agricultural sectors. When some of the banks started crashing in the early 1960s, it developed
various deposit insurance policies and nationalised many financial institutions. Since the
liberalisation in 1991, it had to mend its ways to accommodate the changes taking place in
the Indian economy and allowed the nationalised banks to reinforce their capital markets by
listing into the NSE and BSE.

Initially it had total control over the formulation, implementation and evaluation of the
monetary policy in India which formed a major part of the initial five-year plans under the
leadership of then PM Pandit Jawaharlal Nehru. This mechanism was continued till 2016
when the government led by PM Narendra Modi formed the monetary policy committee
under the RBI to exclusively regulate and implement it.

Since 2016, the policy is formed by the Monetary Policy Committee which essentially
consists of six members, three from the RBI and three nominated by the Government of
India. The suggestion to form such a committee for first mooted by Y.V. Reddy committee
back in 2002. The three members from RBI consist of the ex-officio chairperson, the
governor of RBI, the deputy governor in-charge of monetary policy and the executive
director in-charge of monetary policy. Three members nominated by the government hold
office for four years, not eligible for re-appointment and the other three are officials meaning
they retire at the ages prescribed by the RBI Act and are in the committee by the virtue of
their respective offices. They are supposed to meet each quarter or at least four times a year
to decide on benchmark interest rates.

5
The official RBI website states that

“The Monetary Policy Committee (MPC) constituted by the Central Government under
Section 45ZB determines the policy interest rate required to achieve the inflation target. The
Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the
monetary policy. Views of key stakeholders in the economy, and analytical work of the
Reserve Bank contribute to the process for arriving at the decision on the policy repo rate.
The Financial Market Committee (FMC) meets daily to review the liquidity conditions so as
to ensure that the operating target of monetary policy (weighted average lending rate) is kept
close to the policy repo rate.”1

The various instruments used by the MPC to implement/change the monetary policy are as
follows:

1. Liquidity Adjustment Facility (LAF): It is an arrangement in which the central bank

takes and gives loans from/to banks in order to maintain the liquidity in the market.
Used in order to meet short-term cash shortages. Introduced in India in 1998, after the
recommendations from the Narshimhan Committee. Repo rate and Reverse Repo rate
are types of LAF used to maintain liquidity in India. In USA, LAF comes under the
aegis of Open Market Operations or OMOs.
2. Repo Rate: It is the rate of interest at which the RBI or the central bank lends money
to commercial or other banks or financial institutions in the country in event of a
shortage of funds/ deposits with the bank. When inflation is high, the central bank of
the country, increases it and makes it disadvantageous for the banks to take loans
from the central bank. When inflation is low, this rate is decreased, so that banks get
more funds to distribute as loans and investments. It is used to regulate inflation and
shortage of funds.
3. Reverse Repo Rate: It is the rate of interest at which the central bank takes loans from
the commercial banks or other financial institutions of the country in event of
shortage of money or in order to control money flow in the economy. It works just in
the same manner as repo rate works so that the banks park more money in the central
bank in times of high inflation, in order to earn more interest. It is used to manage
cash-flow in the country. Lower than Repo rate.

1
https://www.rbi.org.in/scripts/FS_Overview.aspx?fn=2752

6
4. Marginal Standing Facility (MSF): It is the rate at which the banks take loans from
the central bank in times of emergency situations when the inter-bank liquidity is not
available. Generally, it is a percentage point more than the repo rate. This is a very
short-term loan. Used in terms of government securities and not liquidity like in LAF.
5. Cash Reserve Ratio (CRR): The banks store a proportion of their deposits as cash at
any moment in time so that if need arises it can be provided to the customer. This
reserve or proportion of cash against the total deposits in the bank is known as cash
reserve ratio (CRR). At times of high inflation, the RBI in order to control money
supply and thereby inflation increases the CRR, so that the banks keep more money
reserved and cannot lend any further. When there is a need to increase the flow of
money in the economy, the CRR benchmark is lowered so that more money is
available to the banks to lend. This reserve is to be kept with the RBI.
6. Statutory Liquidity Ratio (SLR): The banks store a proportion of their deposits as
cash, gold and other securities with itself. This is also mandated by the RBI, which
needs to be fulfilled before extending credit to customers. It works the same as CRR,
although these days banks prefer keeping SLR in the means of government securities
which would provide them with interest and increase its earnings.
7. Open Market Operations (OMO): Open market operations refers to the process of the
central bank of the country buying and selling government securities in order to
maintain liquidity in the economy at times of inflation.
8. Market Stabilisation Scheme (MSS): Introduced in April 2004, this instrument is used
by the RBI to sell the government securities purchased during period of high inflation
at times of lower level of inflation when the liquidity of funds is in excess.
9. Inflation Range: By the Finance Act, 2016 the RBI Act,1934 was amended and a
retail inflation rate range was prescribed which was 4% ±2%. It is calculated by the
Ministry of Statistics and Program Implementation (MoSPI) which releases the
Consumer Price Index report.

7
 Chapter-2 Objectives of Monetary Policy

The primary objective/goal of monetary policy is to maintain economic stability along with
the need for economic growth as stability is a necessary part of growth. It includes many
other goals as well which are more or less related to stabilising the economy of a country and
are briefly defined below:

1. Tackling Inflation: Monetary policy tackles inflation through various measures. If

inflation rate is high a contractionary policy may address the problem on the other
hand, if the inflation rate is low an expansionary policy may be used to address the
problem.

2. Unemployment: Monetary policy influences the unemployment rate in the economy

by changing the money flow in the economy. For example, when an expansionary
policy is used, unemployment rate decreases as when higher the money inflow it leads
to an expansion in the job market.

3. Stability of currency exchange rate: In order to increase or decrease money supply in

the economy, the central bank of the country employs the method of regulating the
exchange rates of currencies with respect to other currencies. This essentially lowers
or pegs the rate of the domestic currency against foreign currency thereby stimulating
money inflow.

4. Economic Growth: One of the main objectives of monetary policy in to enhance or

increase economic growth. Various credit enhancing measures like lowering the
interest rates and making money/ credit easily available help the domestic
manufacturers, service providers and sellers in meeting their short and long-term
demands.

5. Stability: Harmony between all of the above factors is needed for this objective of
monetary policy to be achieved as stability is a major requirement not only for growth
of an individual but for the growth of society as well.

8
 Chapter-3 Economic Stabilisation

After the Great depression, which lasted from 1929-33 and the two World Wars, the world of
economics saw a rise in number of its proponents engaging in what can be said a worldwide
sensitisation program, in order to make the people and the governments understand that
economy is growing not when inflation is high but when a particular level of inflation is
maintained over a period of time so that the people could afford at least the necessities. This
led to the development of what we call the stabilisation policy or simply putting economic
stabilisation. Soon after the concept of sustainable development also started taking shape. The
concepts of economic stabilisation and sustainable development somewhat go hand in hand.
It can be said that the target of stabilisation is sustainable development.

Now we come to a very pertinent question Why is economic stabilisation required? The
answer to which can at the same time be a very simple one as well as a very complex one.
Taking a mid-way approach, it can be said that economic stabilisation was required to keep
the welfare of people and betterment of their standard of living at par with the development
of economy. In the period from 1890s to 1930s, the capitalist economies such as the USA
kept an ignorant approach towards the welfare of people (though the welfare definition of
economics had already surfaced) and focused on the economic growth of the country. Which
ultimately led to the great depression and opened the eyes of the people to this very important
aspect “welfare of the people”. After this catastrophe, the people held the respective
governments responsible and the governments were forced to change their approach. Further,
the development of Keynesian economics also gave support to this policy of stabilisation.
Though most of John Maynard Keynes studies focussed on fiscal policies, they made a huge
impact on monetary policies as well.

Many steps were taken not only by the capitalist countries but also by the communist or the
socialist countries to ensure that the economy is growing but at par with the welfare of their
citizens. This is when the contractionary policies came into being. They were used to control
high rates of inflation, unemployment, exchange rates, etc. Many countries amended their
constitutions to accommodate special provisions for inflation and other subjects affecting the
growth of economy. The measures to control and regulate monetary policy proved to play a
vital role in the in the development of the concept as we know it today. For example, when
money needed to be pumped into the economy to increase the inflation rate, repo rate was

9
decreased, government securities were bought and when the money flow was to be reduced
for controlling the inflation, repo rate was reduced, government securities were sold. Since,
economics is a very dynamic subject and welfare in itself is also very dynamic so, the
concept of economic stabilisation would also remain a dynamic one i.e., there can be no one
definition to the concept nor can it be covered under only one subject matter.

After the Bretton Woods Conference and the formation of organisations like the World Bank
and the International Monetary Fund (IMF), the concept of stabilisation became global and
the nations of the world started not only to apply measures to stabilise the impacts on their
economy but also of that of others. The IMF and the world bank

This concept of economic stabilisation further helps the supply chain as a whole both of large
corporates as well as the overall economic scenario of the world. Since, economy and
economics in itself is dynamic in nature, so it cannot be predicted that where the investments
would increase or decrease or would result in higher yield. However, the investors choose
destinations which offer opportunity to gain yield even if it is at lower rate than at a place
where the yield is higher if the risk factor is less at the former. So is the case with investments
in a particular economy or a country, people are willing to invest in lower yielding countries
with better stability of economy than in higher yielding countries but lower stability.
Moreover, the citizens tend to be more satisfied at a place where income is steadily increasing
or their satisfaction is steadily increasing than at a place where it keeps on fluctuating at
extremes.

10
 Chapter-4 Economic Stabilisation in India
As mentioned earlier, the primary focus of the Indian government in its initial years was the
promotion of agriculture, so the reserve ratios (CRR & SLR) were high. Apart from this,
many there was government monopoly over many of the industries. At this time, most of the
imports were made by the public sector enterprises on behalf of all importers, this practice
was known as canalisation. 2 Here the public sector enterprises became a type of middleman,
the commission or fees charged by them made the price of the good very high. By the mid-
1980s, the government started making reforms after analysing the increasing demands and
the constant rate of production of the industries in India. In 1985, some 21 items were
decanalised which were succeeded by few more items being added to the list before 1989.
The external borrowings of the government increased along with the imports into the country
but the exports started to decline gradually. Eastern European countries at the time took
major share of India’s exports, around this time these countries started to break-up from the
erstwhile Soviet Union which led to reduction of exports to these countries. Adding to all
this, the single largest market of Indian goods, the USA also saw contraction of exports from
India. The fiscal deficit started to decline from to about 8.5% in the period from 1990-91.
Further, an irrational increase in external borrowings at this time in order to curtail current
account deficits aggravated the state of balance of payments to unprecedented lows, taking it
to the verge of collapsing. This time was also market by great political instability. This led to
the 1991 crisis.
Midway by the crisis, a new government was elected under the leadership of P.V. Narsimha
Rao with Dr. Manmohan Singh as his Finance Minister. Dr. Singh led from the front and
introduced fiscal and structural reforms to the Indian economy, which today is known as the
LPG or Liberalisation, Privatisation and Globalisation model. To set the balance of payment
equilibrium in line was important but as much important was taking up structural reforms to
implement the former too. The discussion paper on these reforms brought out by the Ministry
of Finance stated the goals of reforms as
“…to bring about rapid and sustained improvement in the quality of life of the people of
India. Central to this goal is the rapid growth in incomes and productive employment… The
only durable solution to the curse of poverty is sustained growth of incomes and
employment… Such growth requires investment: in farms, in roads, in irrigation, in industry,
in power and, above all, in people. And this investment must be productive. Successful and
sustained development depends on continuing increases in the productivity of our capital,
our land and our labour. Within a generation, the countries of East Asia have transformed
themselves. China, Indonesia, Korea, Thailand and Malaysia today have living standards
much above ours… What they have achieved, we must strive for.”
As mentioned in the statement the primary goal of these reforms was improvement in quality
of life of the people of India, this is a dynamic goal and remains will remain on changing in
future. These reforms were much needed and helped India’s economy grow from just above

2
https://lms.indianeconomy.net/glossary/decanalisation/#:~:text=Decanalisation%20was%20a%20trade
%20liberalisation,is%20the%20end%20of%20canalisation.

11
$200 billion dollars in 1991 to nearly about $3 trillion in 2019-20 (Budget speech 2020
estimate).
Some of the sectors in which reforms took place are listed below:
1. Fiscal Policy: The reforms envisaged to decrease the fiscal deficit from 8.5% to 6.5%
within the time period of one year i.e., by 1992-93. Many subsidies were either
reduced or completely abolished, some were continued, tax reforms took place under
the recommendations of the Chelliah committee, etc.
2. Monetary Policy: Many aspects of the monetary policy and financial institutions
related to it were reformed. For example, banks were given liberty to relocate their
branches to fulfil special functions, the CRR and SLR were reduced, new rules and
regulations were to be made for enhancement of the private participation in the
banking sector, etc.
3. SEBI: Securities and Exchange Board of India (SEBI) was formed in 1988 and given
statutory recognition in 1992. It regulated the securities market and its allocation in
India. It was given the status of an independent regulator and transparency in its
functioning was introduced.
4. Industrial Policy: Principal Secretary to the PM Amar Nath Verma and Chief
Economic Advisor Rakesh Mohan are credited for reforms in this sector. Licensing
industries were decreased and nearly 80-85% of industrial market was available for
work without licenses. Only 8 sectors involving strategic and security concerns were
kept under government monopoly and the rest were liberalised. Disinvestment in
Public Sector Enterprises started.
5. Trade Policy and Foreign Investment: Decanalisation was promoted, the import duties
were rationalised, rupee was devalued by nearly 20% of its then value, Foreign Direct
Investment (FDI) and Foreign Institutional Investment (FII) were promoted, etc.
The effects of these measures are seen even today in the country’s economy. Had these
measures not been taken, India would not have been at the place it is today. However, more
liberal reforms are required to be adopted given the current state of affairs of the economy
under the pandemic.

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 Chapter-5 Monetary Policy of India

In the early years of independent India, the policies of the government and the central bank
i.e., RBI was primarily focussed on the agricultural sector and it was reflected by the high
bank rates, CRR, etc. The growth of the economy was very slow at that period. India at that
period was not a big exporter (it is not even that big an exporter today too) also, it had very
less production at the time apart from agricultural sector, this led to the swelling of the
imports in the country which after 1985, started to take a heavy toll in the account books of
the government. This ultimately led to the 1991 economic crisis. When PM Narshimha Rao
came into power all eyes were set on the position of Finance Minister. He appointed the
former governor of RBI, Manmohan Singh the Finance Minister, who steered India through
these tumultuous times.

The liberalisation and globalisation introduced by the then government started showing its
results only after 1996. By this time the monetary policy was modified to a huge extent. The
ever-high bank rates, CRR and SLR were decreased, new measures to promote locals into
manufacturing and service sectors were taken. Money was infused in the economy to boost
these sectors through decreasing the repo rates, MSFR etc. All these factors together take us
to an assertion that the general trend in the monetary policy of India since 1991 has been that
of an expansionary one. Which was however not seen till the report of Narshimhan
Committee surfaced. CRR was reduced from 25% in 1991 to 10% in 2000 to 3.00% today,
SLR was reduced from 38% in 1991 to 25% in 2000s and further to 18% today. Bank rates
decreased to 6% in 2002, nearly half of what it was in 1990. 3 Retail Inflation decreased from
nearly 14% in 1991 to just above 4% in 2000.4 Various laws have been either amended or
created in order to promote trade in India for example, the Foreign Exchange and Regulation
Act,1973 (FERA) was repealed and a new act the Foreign Exchange Management Act,1999
(FEMA) was enacted under the Atal Bihari Vajpayee government.

As per requirement, the RBI’s Monetary Policy Committee keeps on changing the policy
rates and reserve ratios in order to maintain and enhance the state of economic affairs in the
country. For this, the committee keeps on conduction surveys in the major cities in the

3
https://www.rbi.org.in/scripts/chro_bankrate.aspx.
4
https://www.macrotrends.net/countries/IND/india/inflation-rate-cpi.

13
country in order to obtain ground information and keeping in mind every strata of the society
along with the industrial outlook survey which it undertakes every quarter to better
understand the effects of its policy to the industrial sector. Also, it takes into account the
Economic Survey of India reports of the past years for consideration and suggestions in the
current policy.

Under the prevailing circumstances of the pandemic, in the committee’s recent (August 2020)
meet’s minutes were released and it revised its policy as follows:

 The policy rates remained unchanged.

 Retail inflation rose to 6.09%.
 Allowed banks to restructure loans of large corporates, MSMEs and individuals.
 NABARD and NHB were asked to help in infusing funds in the economy.

At present, the policy rates and reserve ratios are as follows:

 CRR: 3%
 SLR: 18%
 Repo Rate: 4.00%
 Reverse Repo Rate: 3.35%
 MSFR: 4.25%
 Bank Rate: 4.25%5
 Retail Inflation (All India): 7.93%6

5
https://www.rbi.org.in/Home.aspx.
6
http://mospi.nic.in/cpi.

14
 Conclusion

To sum up, a country’s economic stability depends upon the proper and well-regulated
monetary policies. For a country to go for development, its economy must be a stable one or
at least the policies put forward by the concerned bodies must direct the country towards
economic stability. Just as a storm, if not regulated, can create a havoc likewise economic
tranquillity, if not backed up by a strong and well managed monetary and fiscal policy.
Without economic stabilisation, no nation can attain an economy in which trading,
investment and savings all could shine side by side in order to enhancing the business
activity. Monetary policy should be semi rigid and semi flexible so as to cater the need of the
hours. This reasoning was the chief proponent in the amendment to RBI Act,1934 which took
place in 2016. Otherwise, the process of development which has already begun will lag far
behind with uncertainty in the mind of the investors. This will be followed by the decreasing
trends in other sectors as well. The salient ingredients of monetary policy which we have
discussed above like repo rate, CRR, SLR, MFSR and so on, be strictly regulated by the
regulating agency i.e., RBI and its MPC so as not to give any space to any economic
uncertainty or for any obstacle to hamper business activity, thereby creating disturbances in
all or any of the sectors of the economy. For a stabilised economy proper checks and balances
among the various sectors of the economy is of utmost importance. Often, we have seen
inflation, deflation, recession in the economy due to over-estimating of a particular sector
leaving behind the other sectors. A sound and effective monetary policy will definitely bring
the economy to a stabilised state. This stabilised state of the economy will further help the
government run the country in a more efficient manner and focus on the welfare of the
people, which is the goal of almost every state (nation) of the world. It would also help the
businesses to keep up with their foreign counterparts and would promote a healthy
competition. It would also help the consumers as they would have ample amount of money in
their hands to spend along with a huge variety to choose products for their consumption from.

I reiterate that for the achievement of economic stabilisation, both monetary and fiscal
policies need to go hand in hand towards the common goal of sustainable development as
without it the toll which our future generations would have to pay will be heavy. This is
represented through continuous changes which keep on making the process of economic

15
policy making dynamic. As the case of India is concerned, the MPC has to meet at least four
times a year in order to revise the monetary policy if required. As for fiscal policy, we see
regular changes in implementation as well as the policy as a whole during the Budget
sessions each year. From being agriculture-oriented policy, the fiscal policy has evolved to
be balanced one and still has places to go. When the worldwide scenario is taken into
consideration, intergovernmental organisations such as the IMF, the World Bank and
sometimes the European Union (limited to its members only) promote stabilisation of
economies in the region as well as worldwide when economic crises hits. The way India
steered out of the 1991 economic crisis is commendable but at the same time, the reforms
must be analysed on the basis of their merits and demerits for the future generations. Till the
date of submission of this project, I consider the reforms just and precise provided the
prevailing circumstances. However, further reforms are required as India might again
plummet into an economic crisis due to the pandemic and the state of economy even before
it.

Concluding, I would like to assert that economic stabilisation is the way forward for
economies. Both domestic (by governments and central banks) and international (by global
institutions) stabilisation policy need to be revised from time to time. Welfare of people and
their satisfaction is of utmost importance in economics and so is the case with this very
concept.

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