BBA Discuss Monetary Policy of India. Explain it implementing Measure and Performance.

Question: Discuss Monetary Policy of India. Explain it implementing Measure and Performance.

Monetary policy is the process of a government central bank or monetary authority of a country uses to control

(i) The supply of money,

(ii) Availability of money, and

(iii) Cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy and a contractionary policy decreases the total money supply.

Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation.

The Reserve Bank of India being primarily concerned with money matters, organizes currency and credit that it thinks is subservient to the broad economic objectives of the country. In the performance of this task its formulates and executes a monetary policy with clear-cut goals and tools to be used for this.

Implementing Measure:

The objective listed above have been sought to be achieved through various monetary instruments as also by selective controls. Their uses have however, varied from time to time, depending upon circumstances.

(i) Half-Yearly Pronouncements:

The blue prints containing aims and instruments are made known twice in a year. One announced in October, is for October to March, the other announced m April is for April to September. These two divisions are based on two agricultural seasons. The October – March is the busy season.

This requires expansion of money supply to meet the seasonal needs of financing production, movement, and inventory building of agricultural commodities. The April – September period is the slack season. During this period there takes place return flow of money causing contraction in the total money supply. The demand for additional funds will not remain confined to the busy season only. Besides, there will no longer be regular and rhythmic slackening of demand for funds in the slack season.

(ii) Various Instruments:

Several means at the disposal of RBI have been used to influence the three aspects of money namely the rate of interest or price to money, the quantity or supply of money and the access to or demand for money. One principal instrument used has been the Bank Rate or Discount Rate i.e. the rate at which RBI lends to the banking system.

Through changes in it, the RBI affects the short-term interest rates in the money market and through it the long term rates and through it the level of economic activity in the economy. It also influences the international capital movements higher rates attract capital inflows and vice versa.

Another important instrument is the open market operations. These operations involve the sale or purchase of government securities. Another device to influence money supply is the Cash Reserve Ratio (CRR). A higher ratio means that the amount of cash available for creating credit is reduced and vice- versa.

In addition the government imposed an obligation on the banks to use a proportion to cash to buy government securities known as Statutory Liquidity Ratio (SLR). This device has been used for long by the government to get bank funds against its securities carrying low rates of interest.

As such the SLR is becoming redundant. As far the Central Government is concerned. However, since the State Governments depend on this source, the SLR is not to be eliminated. It has, however, been brought down to 25 percent of bank deposits with effect from 1996-97.

Various measures have also been adopted by RBI to achieve the objective of sectorial deployment of credit. For example, 40 percent of the total net bank credit has been earmarked for the priority sectors. Similarly, structure of interest rates has been so used as to provide low interest loans to certain sectors like agriculture and export.

Mixed Performance:

When judged in terms of its results, the monetary policy has been partial success. There are, no doubt, some achievements to its credit, but there are some serious failures too.

Achievements:

The overall requirements of expanding economic activities have been met adequately. At the sectorial level, there have, no doubt, been some inadequacies sometimes, but these have not been seriously short of genuine sectorial needs. In respect of priority sectors, for example, the objective of providing 40 percent of the bank credit has been met.

Again, the funding of several important development programmes for the weaker sections of population has been reasonably satisfactory, If, however, the benefits did not accrue fully to the target groups, the blame does not lie with the monetary policy.

Even in respect of the control of inflation, this is something that goes in favour of the monetary policy. The curbs on the growth of money during the nineties, for example, contributed a lot in reducing the rate of inflation from a high double digit one to a low single digit one.

Serious Failures:

There are, however, some important areas where the performance of the monetary policy has been dismal indeed. The most unsatisfactory result has been in respect of the expansion of money supply. The growth-rate of money has been much in excess of the growth in the real product.

This has been an important cause of the high rise in prices, so that the rate of inflation stayed at high levels for most of the time, causing much damage to the economy and people’s living. Another shortcoming lies in the allocation of funds to various areas of sectors.

The imbalances in credit allocation are more pronounced, when one considers agriculture and small industry on the one hand and the large, organised industry and service sector on the other. Agriculture continues to be dependent upon money lenders to a considerable extent for its credit needs. Very small industries, mostly in the unorganised sector, have virtually no institutional source for funds.