Have a look at your cup of coffee, you had it for $0.25 in 1970, $0.45 in 1980, $0.75 in 1990 and $1.85 in 2022. What has made your coffee’s prices rocketing? INFLATION. Can it be controlled? The answer is ‘certainly’. A customary method to administer inflation is ‘Contractionary monetary policy’.
Monetary policy has its roots in the macro-economical area. Monetary policy is effectuated by the Central bank, in India RBI (Reserve Bank of India) regulates it, whereas in the USA it is in the control of the Federal Reserve Board.
Predominant grounds of Monetary policy are
- Ensuring economic stability
- Acquiring price stability
- Encourage sustainable economic growth
TYPES OF MONETARY POLICY:
A monetary policy can be of two kinds namely:
A. EXPANSIONARY MONETARY POLICY-
It was available in the course of the 2008 financial crisis.
- It is carried out in the time of recession or slowdown.
- Slashed rates of interests
- Boosts money supply
- Inapt to save and thus foster spending
B. CONTRACTIONARY MONETARY POLICY-
In the 1980’s as the effect of contractionary monetary policy the Federal Reserve raised interest rates to 20%.
- Executed during high inflation
- Elevates the interest rates
- Trammels spending
- Lessens money supply
MONETARY POLICY IMPLEMENTS:
RBI is the regulatory body that checks the monetary policy in India. RBI does that by making use of various instruments or tools of monetary policy. Those tools involves:
Open market operation –
Buying and selling (trading) the short term bonds.
Discount rate/ Bank rate –
Rate of interest charged by the central bank (RBI) to the commercial banks. Presently bank rates are 4.25%.
Cash Reserve Ratio (CRR)-
Funds banks keep as a deposit with the central bank (RBI). It is to be kept in the form of cash only. Currently, CRR is 4%.
WHY MONETARY POLICY IS WORTHY OF ATTENTION ?
Attaining price stability –
Major advantage of monetary policy in India is that it dominates inflation by regulating money supply in the country.
Augmenting economic growth –
Monetary policy makes the supply of money accessible so that the economy of a country can flourish.
Fostering savings and investments –
By operating the rates of interest and by administering inflation through monetary policy RBI strengthens savings and investments.
Keeps an eye on business cycle –
Main phases of a business cycle are RECESSION (slowdown) and HIGH INFLATION (boom). Monetary policy watches overs boom and slowdown. Contractionary monetary policy is executed during a boom and Expansionary monetary policy is enacted during the depression period. It regulates the supply of money.
ORDER OF MONETARY POLICY IN INDIA:
RBI monetary policy review [June 2022]
1. Repo rate – 4.90%
2. Reverse repo rate – 3.35%
3. Bank rate – 5.15%
4. MSF( marginal standing facility)- 5.15%
5. CRR(cash reserve ratio)- 4.50%
6. SLR(statutory liquidity ratio)- 18%
7. Inflation projection for FY (fiscal year) 2022-23 = 6.70%
8. GDP projection for FY (fiscal year) 2022-23 = 7.20%
In India there is a committee formed for the well ordered execution of Monetary policy that is the Monetary policy committee. As per the provisions of ‘ The Reserve Bank of India Act 1934’ ( RBI act) , the three members of the committee will be from the RBI and the other three will be appointed by the Central Government.
After discussing these many points about Monetary policy we can conclude it as-
With the aid of Monetary policy a nation regulates their money supply by earmarking interest rates for the purpose of attaining economic stability and growth.
“Money should be spent wisely. Its amount didn’t make our value but how we spend it does.”