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Monetary Policy

Updated on July 18, 2023

Monetary policy refers to the actions taken by the Reserve Bank of India (RBI) to control and manage the country’s economy. The RBI is the central bank of India and is responsible for maintaining price stability, promoting economic growth, and ensuring financial stability. Monetary policy in India is like a set of rules and measures that the RBI uses to influence the availability and cost of money in the country. The primary objective of a monetary policy is to achieve a balance between controlling inflation (rising prices) and promoting economic growth.

How does RBI implement monetary policy?

The RBI uses various tools to implement monetary policy. One tool is the repo rate, which affects borrowing costs for banks. Lowering the repo rate makes borrowing cheaper, encouraging banks to lend more and stimulating economic growth. Raising the repo rate makes borrowing more expensive, discouraging borrowing and spending to control inflation.

Open market operations are another tool used by the RBI to influence monetary policy in India. Through these operations, the RBI buys or sells government securities in the market. When the RBI buys securities, it adds money to the system, boosting the money supply and stimulating economic activity. Conversely, when the RBI sells securities, it takes money out of the system, reducing the money supply and managing inflation. Additionally, the RBI also uses reserve requirements, which are the funds that banks are required to keep with the RBI. By changing these requirements, the RBI can influence the amount of money that banks can lend and the liquidity in the system.

What are the goals of monetary policy?

The main goals of monetary policy in India are to maintain price stability, support economic growth, ensure financial stability, and manage the exchange rate of the Indian rupee. By adjusting these tools, the RBI aims to create a conducive environment for sustainable economic development in the country.