A Brief On India's Monetary Policies

The policy which is designed by the central bank of a nation keeping in perspective the Macro goals for the economy is known as the Monetary Policy of a country. It essentially comprises the management of key aspects such as interest rate and money supply controls. These refer to the demand side of the economic policy which are controlled to attain the liquidity, growth, consumption and inflation macroeconomic objectives.

The R.B.I. or the Reserve Bank of India controls money flow to augment the economic growth rate. In recent times the RBI in league with the government of India has redrawn the framework of the monetary policy so as to make the task of overwhelming the inflation factor as the major determinant in strategy decisions.

A few key points worth a note are:
 

  • Inflation gradually being reduced to 4% with an either way margin or band of 2% within financial year 2016-17 ending March, 2017. This is in line with matter on the finance ministry’s website and the idea is to maintain the inflation around those levels.

 

  • The decision to be inflation centric in policy decisions is in sync with the approach of both the central banks of Europe as well as that of the United States.

 

  • In the times that have been, the central bank has been employing the use of indicating factors such as inflation, exchange rate and liquidity in the banking system to guide monetary factors.

 

  • The process or methodology to achieve the target inflation levels will continue to be a dynamic mix as per the ideas which the R.B.I. governor deems suitable from time to time.

 

  • Inflation had come down to 5.1% in Jan., 2015 and the retail inflation as on May, 2015 had come down to 4.87% for April, 2015.


It has recently been seen that the bank has not limited to introducing key rate cuts at the stipulated meetings but even so in between. For instance the cut which come once the current budget was announced.There are various ways in which the R.B.I. may choose to frame a policy for the better monetary controls management of the economy such as:
 

  • Credit control policies.
  • Bank rate policy.
  • Moral persuasion.
  • Reserve system.
  • Open market operations.


Monetary policy can be contracting or expanding in approach. While reducing interest rates and increasing money supply is a way to tackle deflationary tendencies and expand the economy as such, the opposite contracting is done by increasing interest rate and reserve ratios (CRR and SLR).Thus, to motivate economic growth the RBI may purchase bonds through open market activities to spur money flow into the play.

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