Monetary Policy of any country refers to the regulatory policy in which the Central Bank maintains its control over the supply of money to achieve some goods like stability of employment and price, balanced economic growth and economic development. In other words, monetary policy is employing the central bank’s control of supply of money to achieve general economic stability. In a developing country like India, monetary policy has a wider role to play and they are designed to meet certain requirements. There are some measures of monetary policy like interest rates, Cash Reserve Ratio, selling and buying of bonds etc.
Many a times, there is a confusion regarding monetary policy and credit policy, but they differ from each other.
Monetary Policy is restricted to regulation of cost and availability of credit.
Credit Policy is of a greater significance, since it can affect allocation of bank credit according to the objective of monetary policy.
Monetary policy controls total volume of money in maintaining stability in purchasing power of money.
Credit Policy is the integral part of Monetary Policy.
Objective of Monetary Policy:
The objectives of Monetary Policy should match with that of the economic policy. Monetary Policy should have all the objectives necessary for the development of economy. An economy will grow only if there is growth with stability. We will discuss some objectives of Monetary Policy –
Price Stability – Price stability does not mean complete rigidity of price. It means constant price, over a period of time. A mild does of inflation or a mild increase in price will always work as an incentive for economic growth. Economic growth has no meaning if it is not reaching the common man.
Full Employment – Employment is necessary to bring people above poverty level; it improves the standard of living. Here employment means that ‘employment’ should be available to all those who are willing to work. After the great depression, this objective has gained a very important place in the monetary policy.
Economic Growth – Economic growth is the increase in production of goods and services, increase in GNP, increase in per capita income etc. To promote economic growth there is a need to increase the investment levels. Central Bank, by regulating its credit policy, can control the credit as per the requirement of the economy, Inflation should be controlled and the deflation should be prevented.
The theory has been taken from managerial economics. This is an introduction about understanding of monetary policy.