MONETARY POLICY

The central bank’s policy relating to the control of the availability, cost and use of money and credit with the help of monetary measures to achieve the specific objectives of macroeconomic policy is known as monetary policy. It is the Central Bank of a country that formulates and implements the monetary policy in that country.


 Objectives of Monetary Policy:

The objectives of the monetary policy must be considered as being the part of the overall economic objectives the government pursues. Monetary policy designed and directed to achieve different macro-economic goals, depending upon the basic issues and the nature of the economy.

• To stabilize the level of employment in the economy
• To achieve reasonable price stability and maintain the internal value of money intact
• To acquire steady economic growth and a high and growing level of income and the improvement in the nation’s standard of living.
• To achieve stability in the exchange rate and strengthening of foreign exchange reserves.

 In India, the Reserve Bank of India functions on behalf of the Government and acts according to the direction and guidelines of the Government.  

The significant objectives of the monetary policy are: 

• to establish equilibrium at full-employment level of output, 
• to make the price stable and 
• to motivate economic growth of the economy. 

Monetary policy is related with changing the supply of money stock and rate of interest with the objective of stabilizing the economy at full employment or potential output level by influencing the level of aggregate demand. During times of recession monetary policy adopts some monetary tools to increase the money supply and lower down rates of interest to stimulate aggregate demand. At the times of inflation, monetary policy aims to contract economic spending by squeezing the money supply or increasing the rate of interest. In a developing country like India, monetary policy has also to promote and stimulate economic growth in the country, in addition to obtaining equilibrium at full employment level. 
The major objectives of the monetary policy in the context of developing countries may be stated as: 
1.To achieve price stability by controlling inflation and deflation; and 
2. To ensure economic stability at full-employment. 
3. To promote and encourage economic growth of the economy

TOOLS OF MONETARY POLICY
These objectives of the monetary policy are achieved with exercising the tools of monetary policy which include: 
1. Bank Rate. 
 When the economy is faced with recession,  fall in aggregate demand, the central bank intervenes to expand the money supply lowers down the bank rate and the rate of interest with a view to increase the aggregate demand to stimulate growth in the economy. n market operation.

2. Open Market Operations
In the course of following expansionary monetary policy the central bank undertakes open market operations by buying securities in the open market, lowers the bank rate that encourages banks to reduce the rate of interest, and reduce the Cash Reserve Ratio to be maintained the commercial banks.
3. Cash Reserve Ratio
4. Selective credit controls.

During inflation when aggregate demand rises sharply due to large consumption and investment expenditure due to either large increase in Government expenditure relative to its revenue resulting in huge budget deficits, demand- pull inflation occurs in the economy. Too much creation of money generates inflationary pressures in the economy.  In order to tack the demand-pull inflation the central bank adopts tight monetary policy which aims to reduce the availability of credit and raises its cost. For this purpose the central bank sells the Government securities to the banks through open market operations. This will reduce the reserve with the banks and liquid funds with the general public.  The bank rate may also be raised to discourage the banks to take loan from the central bank. Also the cash reserve ratio may be raised.