Monetary Policy: Definition, Objectives, Types, Tools

Monetary Policy:  The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 5.15% which is a 10-year low in its last policy review of the financial year 2019-20 (FY20). Also the reverse repo rate has also been left unchanged at 4.90%. Read the complete article to know what is repo rate, reverse repo rate and how does this work?

What is Monetary Policy?

Monetary policy is the macroeconomic policy that is laid down by the central bank of a country. The main objective of monetary policy is to maintain the stability of price while keeping in mind the objective of growth. Price stability is a necessary for sustainable growth. This involves the managing of money supply and also the interest rate. It is the demand side economic policy that is used by the government of any country to achieve objectives like liquidity, consumption and growth. In India, the monetary policy of the Reserve Bank of India is aimed towards managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the speed of economic growth. Indian Government sets the inflation target for every five years. Reserve Bank of India has a very important role during the consultation process of inflation targeting. The current inflation-targeting framework in India is flexible in nature.

Objectives Of Monetary Policy

Following are the objectives of Monetary Policy:

  • To Regulate Money Supply in the Economy
  • To Attain Price Stability
  • To promote Economic Growth
  • To Promote saving and Investment
  • To Promote Business Cycle
  • To Promote Exports and Substitute Imports
  • To Manage Aggregate Demand
  • To Ensure more Credit for Priority Sector
  • To Promote Employment
  • To Develop Infrastructure
  • To Regulate and Expand Banking

Types of Monetary Policy

There are two types of Monetary Policy:

  • Expansionary Monetary Policy: When a central bank uses its tools to stimulate the economy that increases the money supply and the lowers interest rates and increases aggregate demand then that type of policy is known as Expansionary Monetary Policy.
  • Contractionary Monetary Policy: Contractionary monetary policy is a form of economic policy that is used to fight inflation which involves decreasing of money supply in order to increase the borrowing cost which decreases GDP and increases inflation.

Tools Of Monetary Policy

 

  1. Quantitative tools: These tools impact the money supply of the entire economy and different sectors like manufacturing, agriculture, automobile, housing, etc.
  2. Qualitative tools: Qualitative tools are very selective tools and have an effect in the money supply of a specific sector of the economy and not on the entire economy of the country.

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