Monetary policy aims to control the supply of money and credit to achieve macroeconomic objectives like price stability and economic growth. In India, the Reserve Bank of India formulates monetary policy through its Monetary Policy Committee (MPC) which decides the policy repo rate. The MPC uses both qualitative tools like credit rationing and quantitative tools like open market operations and reserve ratios to influence money supply and achieve the inflation target set by the government. Key indicators of India's monetary policy include the repo rate, reverse repo rate, CRR, and SLR.
2. ?1. What is monetary policy?
2. Why should a country need a monetary policy?
3. Who makes it?
4. What is the purpose of a monetary policy?
5. What are the instruments used for it?
3. History
Monetary Policy Committee. The Reserve Bank of
India Act, 1934 (RBI Act) was amended by the
Finance Act, 2016, to provide for a statutory and
institutionalised framework for a Monetary
Policy Committee, for maintaining price stability,
while keeping in mind the objective of growth.
4. Reserve Bank of India Act, 1934
An Act to constitute a Reserve Bank of India
Citation Act No. 2 of 1934
Territorial extent Whole of India
Enacted by Imperial Legislative Council
Date enacted 6 March 1934
Date commenced 1 April 1935
Status: In force
5. Definitions
"A policy employing the central banks control of the supply of
money as an instrument for achieving the objectives of general
economic policy is a monetary policy."
According to Prof. Harry Johnson,
"A policy which influences the public stock of money substitute of
public demand for such assets of both that is policy which
influences public liquidity position is known as a monetary policy."
According to A.G. Hart,
7. 1. Rapid Economic Growth
2. Price Stability
3. Exchange Rate Stability
4. Balance of Payments (BOP) Equilibrium
5. Full Employment
6. Neutrality of Money
7. Equal Income Distribution
8. Elements of Monetary policy
1. It regulates the stocks and the growth rate of money supply.
2. It regulates the entire banking system of the economy.
3. It determines the allocation of loans among different sectors.
4. It provides incentives to promote savings and to raise the savings-
income ratio.
5. It ensures adequate availability of credit for growth and tries to achieve
price stability.
10. FITF
• Flexible Inflation Targeting Framework: Now there is a flexible inflation targeting
framework in India (after the 2016 amendment to the Reserve Bank of India (RBI)
Act, 1934).
• Who sets inflation target in India: The amended RBI Act provides for the inflation
target to be set by the Government of India, in consultation with the Reserve Bank,
once in every fiveyears.
• Current Inflation Target: The Central Government has notified 4 percent Consumer
Price Index (CPI) inflation as the target with the upper tolerance limit of 6 percent
and the lower tolerance limit of 2 percent.
• Factors that constitute a failure to achieve the inflation target: (1) the average
inflation is more than the upper tolerance level of the inflation target for any three
consecutive quarters, OR (2) the average inflation is less than the lower tolerance
level for any three consecutive quarters.
11. Present MPC
• Governor of the Reserve Bank of India – Chairperson, ex officio;
• Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy –
Member, ex officio;
• One officer of the Reserve Bank of India to be nominated by the Central Board
– Member, ex officio;
• Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
• Professor Pami Dua, Director, Delhi School of Economics – Member; and
• Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management,
Ahmedabad – Member.(Members referred to at 4 to 6 above, will hold office
for a period of four years or until further orders, whichever is earlier.
12. MPP
• The Monetary Policy Committee (MPC) 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 Markets Operations Department (FMOD) operationalises the
monetary policy, mainly through day-to-day liquidity management operations.
• 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. This parameter is also
known as weighted average call money rate (WACR).