Monetary Policy Monetary policy is one particular aspect of overall macro-economic policy.

Monetary authorities, to influence economic conditions or to achieve economic objectives employ many types of techniques which come under Monetary Policy. Monetary Policy can be broadly defined as "The deliberate effort by the Central an! to influence economic activity by variations in the money supply, in availability of credit or in the interest rates consistent with specific national objectives." efore delvin" into the intricacies of Monetary Policy, let us first discuss its basic concept, i.e., Money. MONEY Money facilitates and motivates all economic activity relatin" to consumption, production, e#chan"e and distribution. Money serves as a medium of e#chan"e, as a store of value, a standard for measurin" values and a standard for deferred payments. The essence of money is to serve as a medium of e#chan"e, the medium throu"h which we buy and sell virtually everythin". Many thin"s have served as money throu"h the a"es$ but today is primarily the era of paper and ban! money, items which have no intrinsic value. Demand for Money %emand for money is defined as the total amount of money that everyone in the economy wishes to hold, by holdin" money we mean showin" a preference for it over other assets. The supply of money refers to the volume of money, held by the public in spendable form in the country. Goals of Monetary Policy &fter the precedin" discussion, we can now enumerate the different "oals of Monetary Policy from a more holistic viewpoint. 'n framin" the Monetary Policy for the economy, the followin" objectives direct the monetary authorities( price stability, e#chan"e stability, full employment and ma#imum output, and a hi"h rate of "rowth. 'ts other objectives are( alance of Payment )quilibrium. )quitable distribution of income and wealth. *eutrality of Money. Creatin", wor!in" and e#pansion of financial institutions. Proper debt Mana"ement. 'ncome +tabili,ation by preventin" or miti"atin" cyclical fluctuations. -peratin" of credit control measures. Price Stability The disturbin" effects of price instability in the economy are felt in the form of usiness Cycles. .hen there are fluctuations in the price level there are fluctuations in the level of economic activities also. Price stability does not mean that the prices are not allowed to chan"e or that they are fi#ed$ it means that the avera"e price as measured by the wholesale or Consumer Price inde# fluctuate within a narrow ran"e. oth inflation /rise in price level0 and deflation /drop in price level0 cause disturbances and have adverse effects on the economy. Exchange Stability )#chan"e rate refers to the value of the currency in terms of another currency. 1luctuations in the e#chan"e rate at once cause rapture in the international commercial and financial relations if a country. 'n financially wea! countries frequent fluctuations in the e#chan"e rate lead to a crisis of confidence and to lar"e-scale withdrawal of short-term funds and capital fli"ht. Full Employment and Maximum Output 1ull employment refers to the optimum utilisation of all the available resources in an economy, vi,. 2and, 2abour, capital and entrepreneurship. 'n the lon" run, the level of output and employment in the economy depends on factors other than Monetary Policy. These include technolo"y and people3s preferences for savin", ris! and wor! effort. +o, "ma#imum" employment and output means the levels consistent with these factors in the lon" run. ut the economy "oes throu"h business cycles in which output and employment are above or below their lon"run levels. )ven thou"h Monetary Policy can3t affect either output or employment in the lon" run, it can affect them in the short run. 1or e#ample, when demand contracts and there3s a recession, the 4overnment can stimulate the economy- temporarily- and help push it bac! towards its lon"-run level of output by lowerin" interest rates. Therefore, in the short run, Central an!s are concerned with stabilisin" the economy- that is, smoothin" out the pea!s and valleys in output and employment around their lon"-run "rowth paths.

Monetary Policy should be directed to ensure that current investment should e#ceed current savin"s and this can be done by creation of credit money or additional ban! deposits or by "reater velocity of circulation of previously held idle balances. igh !ate of Gro"th The Monetary policy must be appropriate to contribute to economic "rowth by adjustin" the supply of money to the needs of "rowth and creatin" the financial infrastructure to channelise the flow of resources towards productive economic activities. .hile full employment is concerned with utilisation of e#istin" resources, "rowth is concerned with increasin" the productive capacity of the economy. Monetary Policy can contribute to the achievement of sustained economic "rowth of the economy in two ways. 1irstly, it will have the responsibility of helpin" to !eep the a""re"ate monetary demand in balance with a""re"ate supply of "oods and services. This would require a more fle#ible Monetary Policy. +econdly, Monetary policy can also promote economic development by creatin" favorable environment for investment and savin"s, which "reatly influence economic "rowth. +avin" is the principle source of supply of investible funds. .hen savin" increases, capital formation can also be accelerated which, in turn, accelerates economic "rowth. #argets of Monetary Policy The Monetary authorities use various instruments of monetary control, in order to influence the "oals in desired directions and de"rees. To decide optimally what to do ne#t, they need to !now what effects its current policy actions have on the "oals. ut in a dynamic world of uncertainty these effects are not delayed and distributed over time, the underlyin" la" structure and the determinants of it are also not !nown reliably. Thus information "aps ma!e the tas! of policy ma!in" very difficult and ha,ardous. Therefore policy ma!ers follow some other variables as pro#ies for "oal variable and use them as their immediate tar"ets on indicators. These are also used to characterise policies as e#pansionary or contractory, easy or ti"ht, inflationary or neutral. Traditionally three variables have served as tar"ets( money supply, ban! credit, and interest rates in securities mar!ets. The 5 ' has been usin" broad money as intermediate and fle#ible tar"et. This because monetary a""re"ates are well understood by the public and the demand for money function is reasonably stable in 'ndia. &lso since various se"ments of the financial mar!ets are not closely inte"rated it is better to tar"et money supply rather than interest rates. $hat next %"ith special reference to &ndia'( 't is very difficult to predict the precise monetary policy measures for the future. The authorities have of late been emphasisin" the need for and desirability of a shift from direct to indirect techniques of Monetary Policy. 1rom this point of view the reactivisation of an! 5ate and the efforts to ma!e -M-s effective are quiet welcome. 6owever, the theoretical and the 2%C-situation 7specific limitations of -M-s cannot be underplayed. 't may not be proper discard certain types of direct controls in the interest of the efficient allocation of resources and the price as well as overall financial stability. Some important considerations that could go)ern the steps to be ta*en by the monetary authorities in the future could be+ 8. 1inancial +ector 5eforms( 1inancial sector reforms quic!en the pace of structural transformation in the financial system. 't helps to modernise the instruments of monetary control so as to ma!e them more suitable for the conduct of Monetary Policy in a mar!et economy, i.e. .to increase the reliance on indirect or mar!et-intensive 7 based instruments of monetary control. The advanta"es accruin" throu"h 1+5 would include improvement in the or"anisational effectiveness and ris! mana"ement by all financial entities. There is also improvement in payment and settlement systems. %evelopment of secondary mar!et in "overnment securities uildin" up of decentralised capital and credit mar!ets comprisin" unit ban!s, informal credit system, primary credit co-operatives, etc. *urturin" of a philosophy of ethical finance throu"h conscious and systematic efforts for people3s education. 9. 1inancial sector reform cannot afford very much ahead very much ahead of the real sector reform$ and financial cannot carry the burden of the whole economy.

:. The pace of chan"e in policy should ta!e into account the e#pectations of the mar!et participants$ but only to the e#tent that they are consistent with other policies and practical. ;. &s the pace of reforms depends upon the response from mar!et participants to a lar"e e#tent, it should be rec!oned what the lar"e players can cope with, "iven the institutional and attitudinal ri"idities. <. -ver a period we have had a variety of institutions, vi,. an!s, 1's, 1''s, * 1Cs, etc. .e must have a level playin" field for all these, thou"h it is difficult to ensure and define such a field. =. 1inancial mar!ets and institutions are not fully developed in all parts of the country. This must be especially reco"nised when policy directly affects rural and semi-urban areas. >. There has been an increasin" mar!etisation of financial structure and international capital flows. Monetary policy needs to respond to these chan"es on an on"oin" basis. 'n an administered interest rate and e#chan"e rate re"ime, the quantity variables dominate and transmit Monetary Policy impulses. The monetary authorities must be supple enou"h and reflective enou"h with a well oiled machinery so that they respond quic!ly to these impulses. ?. 'f the economic objective if hi"h "rowth rate with social satiability is to be achieved there should be a minimum consensus amon" all political parties on !ey issues. &lso there should be "reater autonomy and independence to the 5 ' which plays a crucial role in the monetary and e#chan"e rate stability.