Published Article Details

What is RBI's monetary policy?

Posted by: Labdhi Mehta on Dec 31, 2018, 10.34 AM IST

1. Monetary policy is the process by which a central bank (Reserve Bank of India or RBI) manages money supply in the economy. 

2. The objectives of monetary policy include ensuring inflation targeting and price stability, full employment and stable economic growth. 

3. The money supply can be directly affected through reserve ratios or open market operations and can be indirectly affected by using key interest rates to influence the cost of credit. 

 

4. An easy or expansionary monetary policy is implemented by reducing statutory bank reserves or lowering key interest rates and improving market liquidity to encourage economic activity. 

5. A contractionary or tight monetary policy reduces liquidity and increases interest rates which has a negative impact on both production and consumption and therefore, economic growth. 

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