INDIAN MONETARY POLICY

Monetary policy is usually defined as the Central Bank’s policy pertaining to the control of the availability, cost and use of money and credit with the help of monetary measures in order to achive specific goals. In the Indian context, monetary policy companies those decisions of the government and the Reserve Bank of India which directly influence the volume and composition of money supply, the size and distribution of credit, the level and structure of interest rates, and the effects of these monetary variables upon related factors such as savings and investment and determination of output, income and price.

The board concerns of monetary policy in India have been to regulate monetary growth so as to maintain a reasonable degree of price stability and to ensure adequate expansion in credit to assist economic growth. It also has been to ensure adequate expansion in credit to assist economic growth. Monetary policy is implemented by the RBI through the instruments of credit control. Generally two types of instruments are used to control credit. They are quantitative or general measures and qualitative or selective measures. The quantitative measures are directed towards influencing the total volume of credit in the banking system without special regard for the use to which it is put. Selective or qualitative instruments of credit control, on the other hand, are directed towards the particular use of credit and not its total volume.

The Bank Rate Policy is the traditional weapon of credit control use by a central Bank. The bank Rate is the rate at which the Central Bank discounts the bills of commercial banks. When the Central Bank wishes to control credit and inflation in the economy, it raises the Bank Rate.  Increased the cost of borrowings of the commercial banks who in turn charge a higher rate of interest from their borrowers. This means the price of credit will increase.