The document discusses the monetary policy of India. It defines monetary policy as regulating money supply and credit in the economy through tools like regulating bank rates, cash reserves, and credit allocation. The Reserve Bank of India formulates monetary policy to achieve objectives like maintaining price stability, promoting economic growth, and encouraging savings. The techniques used include controlling money supply, regulating banks, and using tools like adjusting bank rates, imposing cash reserve ratios, and directing credit allocation between sectors. The limitations include monetary policy having a limited role in development and inflation control compared to other economic factors.

1. MONETARY POLICY OF INDIA

2. Meaning of Monetary Policy
Monetary Policy of India is formulated and executed by the Reserve Bank of India to
achieve specific objectives. It regulates money supply in the economy. Money refers to
currency and credit creation by banks. When public deposits money with banks, banks
retain a part of the deposit in cash and the remaining part is used by banks to create
credit by providing loans to the public. This credit also becomes part of money supply.
RBI through its monetary policy regulates credit and thereby money supply in the
economy.

3. The main elements of the monetary policy of India:
1. It regulates the stock of money and the growth rate of money supply.
2. It regulates the entire banking system of the economy.
3. It regulates the level and structure of interest rates directly in the organised sector
and indirectly in the unorganised sector. It also regulates credit creation by banks.
4. It determines the allocation of loans among different sectors.
5. It provides incentives to promote savings and to raise the saving-income ratio.
6. It ensures adequate availability of credit for growth and tries to achieve price
stability.

4. Objectives of Monetary Policy
1. To Regulate Money Supply in the Economy: Money supply includes both money in circulation and
credit creation by banks. Monetary policy is framed to regulate the money supply in the economy by
credit expansion or credit contraction.
2. To Attain Price Stability: It implies control over inflation. Price level is affected by money supply.
Monetary policy regulates money supply to maintain price stability.
3. To Promote Economic Growth: Monetary policy makes available the necessary supply of money and
credit for the economic growth of the country.
4. To Promote Saving and Investment: By regulating the rate of interest on deposits monetary policy
promotes saving and investment. By offering a higher rate of interest on deposits, monetary policy
encourages the public to save and invest.
5. To Promote Employment: By providing concessional loans to productive sectors, small and medium
entrepreneurs, special loan schemes for unemployed youth, monetary policy promotes employment.
6. To Develop Infrastructure: Monetary policy aims at developing infrasåucture. It provides concessional
funds for developing infrastructure

5. Techniques/Measures of Monetary Policy of India
A. Measures for Expansion of Currency: In India the Reserve Bank has sole right
to issue currency. It can issue any amount of paper currency against the
minimum security of 200 crore comprising gold and foreign securities, of
which gold should be of worth at least 115 crore.
A. Measures for Credit Control: Besides currency. credit is an important
component of money supply and money in circulation in the economy. RBI
regulates the supply of credit in the economy through various quantitative and
qualitative credit control techniques.

6. Measures for Credit Control under Monetary policy
Control of credit is one of the main objectives of monetary policy of India. Control of
credit means increase or decrease in the flow of credit in the economy in accordance
with its need.
The Reserve Bank of India adopts all those measures for the control of credit which
central banks in other countries do.
These measures/instruments may be classified as:
(A) Quantitative Credit Control,
(B) Qualitative or Selective Credit Control.

7. Quantitative Credit Control
1. Bank Rate: Bank rate is also known as discount rate. It is the rate at which RBI discounts or rediscounts
the bills of commercial banks. If the bank rate is increased, then commercial banks also charge a higher
rate of interest on loans given by banks to the public because now RBI charges a higher discount rate,
while discounting bills of commercial banks.
2. Moral Persuasion: RBI can exercise moral influence upon the member banks with a view to pursue its
monetary policy. RBI convinces commercial banks to curb loans to unproductive sectors. From time to
time, RBI holds meetings with the banks seeking their cooperation in effectively controlling the monetary
system of the country.
3. Credit Authorisation Scheme (CAS): This scheme was introduced by RBI in 1965. Under this scheme,
the banks were to take authorisation of RBI before sanctioning any fresh loan of 1 crore or more to any
single party.
4. Credit Monitoring: Under these arrangements, RBI monitors and scrutinises all sanctions of bank loan
exceeding 5 crore to any single party for working capital requirements It scrutinizes all such loans after
these are sanctioned by commercial banks.
5. Direct Action:According to Banking Regulation Act, 1949, RBI can stop any commercial bank from any
type of transaction. In case of defiance of the orders of RBI, it can resort to direct action against the
member bank.

8. Suggestions for Improvement in Monetary Policy
1. Price Stability: Price stability should be the main objective of monetary policy. Reserve Bank's credit to
the government should be restricted and RBI should control the amount of credit in such a way that price
stability objective can be achieved.
2. Coordination between Monetary and Fiscal Policies: Monetary and fiscal policy should be
coordinated so that these support each other in achieving the desired goals.
3. Flexible Rate of Interest: The banks should have greater freedom in determining their rate of interest.
4. strengthening Money Market: The money market in India should be strengthened so as to make it
more efficient. It will increase the participation of more investors in purchase and sale of government/RBl
securities.
5. Monetary Targeting: Monetary targeting means fixing targets for the growth of money supply in the
economy. RBI should fix monetary targets so as to regulate the growth of money supply in the desired
direction. These targets should be reviewed during the year to accommodate changes in market
conditions like credit requirements in the economy
6. Credit Planning: The sectoral credit allocation should be in line with plan priorities. RBI should give
guidelines for credit allocation to different sectors. viz., agriculture, industry, service sector. etc. The
credit allocation should be in line with the plan priorities
7. Proper Implementation: For achieving objectives of monetary policy, it should be strictly implemented.
Strong action should be taken against commercial banks which do not follow the guidelines of RBI.

9. Limitations of Monetary Policy of India
1. Limited Scope of Monetary Policy in Economic Development: In reality monetary policy
has been assigned only a minor role in the process of economic development. Reserve
Bank is not given any predominant role in the process of economic development.
2. Limited Role in Controlling Inflation: The monetary policy of Reserve Bank has played
only a limited role in controlling the inflationary pressure. Prices are affected by many
factors. Money supply is only one of them.
3. Poor Banking Habits: Poor banking habits of Indian masses hinder the functioning of
monetary policy. Banks create credit out of deposits made by public. But people in India
prefer to make use of cash rather than cheques.
4. Kisan Credit Cards (KCCs): KCC is a credit card which is issued by banks to farmers for
availing credit facility as per their requirements.
5. Micro Credit: In the new monetary policy, banks have been advised to provide maximum
support to Self Help Groups (SHGs). SHG refers to group of persons engaged in self-
employment. The scheme of micro credit through Self Help Groups is progressing well

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