MONETARY POLICY

INTRODUCTION

• As citizens of a free nation, we have many dreams about what ought to be the state of affairs in our economy. We value stable prices and low rates of inflation. We share a quest for well-being through high levels of growth which ensure jobs and prosperity and we work towards it. 
• Unfortunately, in reality, we live in a crisis prone economy with nightmares of financial downturns, of being laid- off or being battered by financial crises. We observe that the Reserve Bank of India is occasionally manipulating policy rates for maneuvering liquidity conditions with reasons thereof explicitly notified. 
• In fact, we have only a limited understanding of the monetary phenomena which coutld strengthen or paralyse the domestic economy. The discussion that follows is an attempt to throw light on the well- acknowledged monetary measures undertaken by governments to fight economic instability.

 MONETARY POLICY DEFINED

• Monetary policy refers to the use of monetary policy instruments which are at the disposal of the central bank to regulate the availability, cost and use of money and credit to promote economic growth, price stability, optimum levels of output and employment, balance of payments equilibrium, stable currency or any other goal of government's economic policy. 
• In other words, monetary policy is essentially a programme of action undertaken by the monetary authorities, normally the central bank, to control and regulate the demand for and supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals.
•  Monetary policy encompasses all actions of the central bank which are aimed at directly controlling the money supply and indirectly at regulating the demand for money. Monetary policy is in the nature of ‘demand-side’ macroeconomic policy and works by stimulating or discouraging investment and consumption spending on goods and services. It is no surprise that monetary policy is regarded as an indispensable policy instrument in an economy.

 THE MONETARY POLICY FRAMEWORK

The central bank, in its execution of monetary policy, functions within an articulated monetary policy framework which has three basic components, viz.

(i) the objectives of monetary policy,

(ii) the analytics of monetary policy which focus on the transmission mechanisms, and

(iii) the operating procedure which focuses on the operating targets and instruments.