The primary responsibility of the monetary authorities in a developing country like India is to reduce the pressure off monetary demand, without hampering production, so as to help maintain the pre-determined pace of economic development.
- The Central Bank of a country is responsible for the expansion and contraction of money and bank credit as per the needs of the economy.
- In India, it is done by the Reserve Bank of India. The Reserve bank of India has been taking from time to time the various measures to provide adequate finances for production on one hand, and to control the inflation generated through deficit financing on the other.
- The RBI as the central bank of India is responsible for augmenting the credit facilities giving them a purposive direction as per national priority.
- This has made the RBI to formulate the monetary policy to encourage the credit flow into the desired direction without bringing a contraction in the total quantum of credit.
- Monetary Policy is interpreted to cover the steps taken by the government and the banking institutions to manage the money and credit supplies including steps taken from time to time to control and regulate the interest rates.
- The monetary policy is formulated by the government in consultation with the Central Bank and is carried out through the RBI. Monetary policy is not an end in itself; it is rather a means to achieve certain ends.
Objectives of Monetary Policy in India
During the course of planning since 1951, the monetary policy of India aimed at the following objectives with the emphasis on growth and price stability:
- To promote savings and tap potential savings
- To mobilise savings for capital formation and for growth in investment projects.
- To promote monetization and monetary integration in the country;
- To provide the incentive to investment, and thus to prepare an investment climate conducive to the fulfillment of plan objectives.
- To provide extensive credit to cater the growing needs of agriculture, industry, trade, commerce, and other productive activities, thereby promoting overall economic growth.
- To curb the inflationary spiral. To maintain an appropriate structure of relative price and general price stability.
- To permit growth without any financial impediments
The monetary policy has been pursued to achieve the twin objectives of the Government:
(a) to accelerate the process of economic growth with a view to raising national income, and (b) to control and reduce the inflationary pressures in the economy.
Thus, the monetary policy of the RBI during the course of planning has been appropriately termed as that of ‘controlled expansion’. It aims at the adequately financing of economic growth and at the same time, ensuring reasonable price stability in the country.
Policy of Credit Expansion
The overall trend in the economy during the planning period has been that of continuous expansion of currency and credit with an objective of meeting the developmental needs of the economy.
- Revision of Open Market Operation: The RBI revised its open market operations policy in October 1956, according to which it started giving discriminatory support to the sale and purchase of government securities.
- Liberalisation of the Bill Market Scheme: Through the bill market scheme, the commercial banks receive additional funds from the RBI to meet the increasing credit requirements of their borrowers.
- Facilities to priority sectors: The RBI continues to provide credit facilities to priority sectors such as small-scale industries and co-operatives, even though the general policy of the Bank is to control credit expansion.
- Refinance and Rediscounting facilities: The banks are permitted to refinance equal to one percent of the demand and time liabilities at the rate of 10 percent per annum.
- Credit facilities through financial institutions: The RBI has also been instrumental in the establishment of various financial institutions like IDBI, IFCI, IRCI, ICICI, SFCs, NABARD etc.
Through these institutions, the RBI provides medium and long-term credit facilities for development.