(Sample Material) IAS PRE GS Online Coaching : Economic & Social Development - Monetary & Credit Policy

Subject: Economic & Social Development
Topic: Monetary & Credit Policy

Definitions

• The strategy of influencing movements of the money supply and interest rates to affect output and inflation
• The actions of a central bank that determine the size and rate of growth of the money supply, which in turn affects interest rates.
• A macroeconomic policy tool used to influence interest rates, inflation, and credit availability through changes in the supply of money available in the economy
• An attempt to achieve broad economic goals by the regulation of the supply of money
• The regulation of the money supply and interest rates by a central bank in order to control inflation and stabilise currency
• Monetary policy is the process of managing a nation’s money supply to achieve specific goals—such as constraining inflation, achieving full employment etc. Monetary policy is made by the central bank to manage money supply to achieve specific goals—such as constraining inflation, maintaining an appropriate exchange rate, generating jobs and economic growth. Monetary policy involves changing interest rates, either directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets.

Ques. 1 : Define Monetary Policy and its objectives?

Ans. The use by the Central Bank of interest rate and other instruments to influence• money supply to achieve certain macro economic goals is known as monetary policy. Credit policy is a part of monetary policy as it deals with how much and at what rate credit is advanced by the banks. Objectives of monetary policy are:-

• accelerating growth of economy
• price stability
• exchange rate stabilization
• balancing savings and investment
• Generating employment and

Historically, the Monetary Policy was announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial—year. Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. However, since monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy.

However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. A review of the policy takes place every quarter.