What Is Monetary Policy | Definition, Instruments & Types Monetary Policy

What Is Monetary Policy | What Is Monetary Policy Definition | Types Monetary Policy | Monetary Policy Committee

There are various types of monetary instruments that will be taken into consideration by the central bank and through these instruments, the liquidity and the economical growth of our country will be defined. Given below, we will be answering the most important question of what is Monetary Policy? We will also share with all of you the specifications of the Definition, Instruments & Types Monetary Policy. There are a lot of instruments inside the monetary policy which will be affecting the economical growth and the liquidity of various commercial and also Central banks available in India.

What is Monetary Policy?

The monetary policy refers to the policy of the central bank through which all of the Other monetary instruments will be used by them in order to control and achieve the specific goals presented by the Reserve Bank of India Act 1934. There are various primary objectives and secondary objectives of the Monetary Policy and one of the main objectives of the monetary policies are to maintain price stability by also taking into consideration the economic growth of the country. Monetary policy is determined by the monetary policy committee constituted by the central bank and this committee is responsible for taking into consideration various instruments of economic growth and price stability present in our country.

What Is Monetary Policy

Nominee in LIC Policy

Need For Monetary Policy

There is a very high need for Monetary Policies in India and given below we are discussing some pointers:-

  • Monetary policy is specifically made by the central bank in order to help prevent inflation and the monetary policies are often targeting inflation levels in the economy. A low level of inflation is particularly good for the economy however if the inflation is higher then the contractionary policy is made by the central bank in order to lower the inflation.
  • Monetary policies are also often taken into consideration thinking about the unemployment statistics present in the economy. The central bank will be implementing expansionary monetary policy in order to tackle the unemployment rate.
  • Money supply is also one of the main reasons for implementing a monetary policy and it will also affect the currency exchange rate drastically.

Monetary Policy Committee Members

There is a proper committee which is presented by the central government in order to take into consideration the monetary policy and given below we are sharing the details of each and every member:-

  • Governor of the Reserve Bank of India—Chairperson, ex officio;
  • Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy—Member, ex officio;
  • One officer of the Reserve Bank of India to be nominated by the Central Board—Member, ex officio;
  • Prof. Ashima Goyal, Professor, Indira Gandhi Institute of Development Research —Member;
  • Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad—Member; and
  • Dr Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi— Member.
What Is Monetary Policy

Instruments of Monetary Policy

There are various instruments that are included inside a Monetary Policy and these instruments will be helping in price stabilization and economic growth of the country:-

  • Repo Rate is the interest rate at which the Reserve Bank provides loans to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
  • Reverse Repo Rate is the interest rate at which the Reserve Bank takes liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  • Liquidity Adjustment Facility consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of a range of tenors. The aim of the term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve the transmission of the policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
  • Marginal Standing Facility (MSF) is a facility under which scheduled commercial banks can borrow additional amounts of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
  • Corridor is the MSF rate and reverses repo rate determines the corridor for the daily movement in the weighted average call money rate.
  • Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
  • Cash Reserve Ratio (CRR) is the average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
  • Statutory Liquidity Ratio (SLR) is the share of NDTL that a bank is required to maintain in safe and liquid assets, such as unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
  • Open Market Operations (OMOs) include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
  • Market Stabilisation Scheme (MSS) for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

LIC Loan Against Policy

Types of Monetary Policy

There are two types of monetary policies that can be adopted by the central bank and given below we are exploring both of them:-

  • Contractionary Policy- The central bank will be adopting a contractionary monetary policy in order to control the economic conditions related to inflation because the contractionary monetary policy will be shrinking the money supply in the financial system. The central bank will be selling short term Government securities and will increase the borrowing rate.
  • Expansionary Policy- The Central Bank will be implementing expansionary policy when they want to increase the money supply. The central bank will buy short term government securities and lower the borrowing rate so that there is more money flowing into the economy.
Types of Monetary Policy

FAQs For Monetary Policy

What do you mean by repo rate?

The repo rate is the rate on which the Reserve Bank provides loans to commercial banks. It affects the spiral of inflation.

What are the different types of monetary policies?

There are two types of monetary policies namely contractionary policy and expansionary policy.

Which policy must be adopted in order to control inflation?

The central bank will adopt a contractionary monetary policy in order to control inflation.

What are the effects of the expansionary policy presented by the central government?

The expansionary policy will be required in handling customer spending and decreasing unemployment however it will be resulting in inflation.

What do you mean by discount rate?

The central bank charges and interest for short-term landing to the commercial bank and this interest rate is known as the discount rate.

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