Monetary Policy is a macroeconomic policy laid down by the central bank or the currency board which involves the management of money supply and interest rates in the economy to ensure growth, liquidity, price stability and general trust in the currency.
The Central bank of India was established in 1935 and is the regulatory authority of India. It operates the monetary policy and issues bank notes and coins, and acts as an investment bank for central and state government and maintains their funds, extends credit to commercial banks.
India entered into an era of financial planning in 1951. At that time, the monetary and fiscal policies had to be managed keeping in mind the development of the country and accordingly the economic policy was more focused on the following two points:
- To accelerate the financial development of the nation and raise the standard of living of its people.
- Regulating and minimising the inflationary pressure on the economy.
Since 1972, there is escalation in money supply with public and banking system. The recurring defects in government policies and global inflationary pressures led the government to introduce a policy which is more suitable for the economic development of the country and streamline the functioning of the monetary policy.
Monetary policy is purely governed by the RBI. Monetary policy influences savings, output, investments, income and price level in the economy through both monetary and non-monetary measures. Significantly Reserve bank of India uses various instruments to control money supply like bank rates, repo rate, reverse repo rate, marginal standing facility, cash reserve ratio, statutory liquidity ratio, etc. to achieve the economic growth and maintain price stability.
Reserve Bank of India announces the monetary policy every year in the month of April having three quarterly reviews in July, October and January. The monetary policy consists of 2 parts viz. Part A: monetary developments; Part B: Measures to be taken and implementation of fresh policy. It deals with all significant points relating to financial stability, interest rates, all regulatory norms, financial markets and other macroeconomic aspects.