The Monetary Policy was established by the Reserve Bank of India and it relates to the monetary policy of the nation. The policy involves the measures taken and strategies used to regulate the supply of money, the cost of credit in the economy, and availability in the market.
The policy also focuses on the distribution of credit among users as well as the borrowing and lending rate of Interest. The policy is significant in the promotion of economic growth for India. Instruments of monetary policy include bank rates, other interest rates, selective credit controls, supply of currency, and open market operations.
Objectives of Monetary Policy
- The promotion of investments and savings as monetary policy controls the rate of Interest and inflation within the nation. A higher rate of interest provides a greater chance of investment and savings
- Monetary policy helps export-oriented units to reduce imports and increase exports. In turn, it improves the condition of the balance of payments
- As monetary policy can help in reducing the interest rates, MSME can secure a loan at ease for planning a business expansion. Also, it leads to great employment opportunities.
- When the rate of interest is down and credit is expanded, it allows more people to secure loans for purchasing goods and services.
- RBI controls the entire bank industry as it is the apex body. Being the apex body, it instructs banks using the monetary policy to establish rural branches whenever necessary for agricultural development.
- The government establishes rural banks and cooperative banks to help farmers and locals to receive financial aid at ease.
Monetary Policy Tools
To keep the demand for goods and services stabilized, RBI needs to reduce the money supply or raise the cost of funds.
Following are the RBI monetary policy tools
Quantitative Tools
Reserve Ratio – Banks are required to reserve a set percentage of cash reserves or RBI assets. It is of two types.
- Cash Reserve Ratio – Banks are instructed to set aside the portion of cash with the RBI. It can’t be lent to anyone nor can it earn any interest.
- Statutory Liquidity Ratio (SLR) – Banks are required to set aside the portion in liquid assets like gold or RBI-approved securities. However, banks earn interest on these securities which is very low.
Qualitative Tools
Qualitative tools are selective tools that affect the money supply for a specific sector of the economy.
- Margin Requirements – The RBI prescribes a certain margin against collateral, which in return impacts the borrowing habits of customers.
- Moral Suasion – By this method, RBI convinces banks to keep money in government securities rather than certain sectors.
- Selective Credit Control – Controlling credits by avoiding lending to selective industries.
The RBI made no changes to the repo rates (4%) for the seventh time and announced that the GDP growth is set to be 9.5%. RBI also told in the report that our county is doing much better economically as compared to how it was doing in 2021.