RBI Monetary Policy 2023: Objectives, Meaning, Monetary Policy in India UPSC Notes

What is Monetary Policy?

Monetary Policy is a set of guidelines laid out by the Reserve Bank of India which governs the entire functioning of all the financial institutions of the country. The RBI monetary policy controls the interest rates of banks including other rates such as the SLR, CRR, etc.

The Monetary Policy in India keeps a check on the liquidity and inflation in the economy. The RBI shifts the rates accordingly which leads to increased or decreased inflation in the economy. The policy helps keep the prices of goods and services stable and in check.

RBI Monetary Policy 2023 Highlights

Some of the major highlights of the Monetary Policy 2023 are listed below. It is released by the Governor of the Reserve Bank of India, Shaktikanta Das, on 8th June 2023.

• The repo rate remains unchanged for the Fiscal Year 2023-24. It is kept the same, i.e., 6.5%.
• The projection of GDP Growth rate is as follows: 1st Quarter – 8%, 2nd Quarter – 6.5%, 3rd Quarter – 6%, and 5.7% in the last quarter.
• The Inflation projection went down by 0.1% from 5.2% in April to 5.1% in the new Monetary Policy.

Monetary Policy in India

In order to promote economic growth, RBI uses Monetary Policy to control the overall money supply in the economy.

• This Monetary Policy was constructed under the RBI Act in 1934.
• This policy is often considered a contractionary or an expansionary and is different from the fiscal policy, which manages the taxes and overall expenses of the country.
• When the total money is increased more suddenly than normal, it is called expansionary policy.
• When a slower increase or decrease in money occurs, it is called contractionary policy.

Objectives of Monetary Policy

The objectives of Monetary Policy are primarily set by the Reserve Bank of India and are aimed at achieving sustainable economic growth with price stability. The key objectives of monetary policy in India include:

• Price Stability: Maintaining stable prices is one of the primary objectives of monetary policy. The RBI aims to control inflation within a target range. Price stability is crucial for maintaining the purchasing power of the currency and promoting economic stability.
• Growth Promotion: Monetary policy also aims to foster sustainable economic growth. The RBI uses various policy measures to ensure adequate availability of credit to productive sectors of the economy. By managing interest rates and liquidity conditions, the RBI endeavors to support investment, consumption, and overall economic activity.
• Financial Stability: Another objective of monetary policy is to maintain stability in the financial system. The RBI monitors and takes measures to ensure the soundness and resilience of banks and other financial institutions. It regulates and supervises the banking sector to promote financial stability, which is vital for sustainable economic growth.
• Exchange Rate Management: The RBI also plays a role in managing the exchange rate of the Indian rupee. While exchange rate management is not the primary objective of monetary policy, the RBI intervenes in the foreign exchange market to smoothen excessive volatility and maintain stability in the external value of the currency.
• Transmission of Monetary Policy: Effective transmission of monetary policy is crucial for achieving the desired objectives. The RBI aims to ensure that changes in policy rates and other measures are effectively transmitted to banks and financial institutions, and ultimately to borrowers and consumers. This helps in influencing borrowing costs, credit availability, and overall economic activity.

Tools of Monetary Policy

The tools of Monetary Policy can be broadly classified into two major categories of Qualitative tools and Quantitative tools. These tools are utilized in order to maintain the growth rate of the economy thereby controlling inflation.

• Qualitative Tools of Monetary Policy: These tools are also referred to as ‘selective’ as they are not used as rigorously as the Quantitative tools. These are used for differentiating between the variety of uses of credit facilities. Examples are – Credit Rationing, Consumer Credit Regulation, etc.
• Quantitative Tools of Monetary Policy: These types of tools come under the general category that is used more often by the RBI. They are used to limit the amount of money in the economy which is termed liquidity. Some examples are Bank Rate, Open Market Operations, Repo Rate, Reverse Repo Rate, SLR, CRR, etc.

Importance of Monetary Policy

Monetary Policy is an extremely important tool which is required to stabilize the economy. It is the duty of the Central Bank to frame the policy. The RBI is also responsible to make sure that the monetary policy in India is implemented to the core.

The importance of the Monetary Policy lies in its ability to directly influence the Indian economy. Its main target is the inflation rate along with ensuring the stability of the prices in the Indian market. Maintaining the growth rate of the economy is one of the primary objectives of the RBI Monetary Policy.

Instruments of Monetary Policy

The instruments of monetary policy introduced and regulated by RBI to control the money supply in the economy are as follows:

• Open Market Operations: These are exchanges of the securities like government bonds or banks. The Reserve Bank of India need to sell government securities to have control over the flow of credit, and they also need to buy government securities to increase the credit flow.
• Cash Reserve Ratio: It is also called CRR, which is one of the most commonly used instruments of monetary policy. A specific amount of the back deposit with the banks is needed to keep with the Reserve Bank of India in the form of a balance or reserve. The CRR was 15% in 1990, which was got down to 5 % in the year 2002. And currently, the CRR is 4 per cent.
• Statutory Liquidity Ratio (SLR): All financial institutes need to maintain a certain level of liquid assets within themselves at any time of their total time. It is what is meant by the Statutory Liquidity Ratio. These are the assets kept in a non-cash form, just like silver, gold, diamonds, and other precious metals and bonds. The SLR stood at 18.25 per cent in December 2019.
• Bank Rate Policy: It also has another name which is the discount rate. It is the interest that the Reserve Bank of India charges for providing loans and funds to the banks. If the bank rate increases, the credit volume will go down, and the available money will be less. On 31st December 2019, the bank rate was 5.40% and is continuing till today.
• Credit Ceiling: This is the type of Monetary policy instrument which make the Reserve Bank of India prior information about the loans to the bank will be made available to a certain limit. Thus, this makes the banks have a certain loan to the sectors.

Role of Monetary Policy

The Finance Act of 2016 revised the Reserve Bank of India Act 1934 to provide a statutory and institutionalised framework for a monetary policy committee to ensure price stability while keeping growth as a goal in mind. The responsibility of setting the benchmark policy rate (repo rate) necessary to keep inflation within the designated target level falls to the committee. The key role of monetary policy is to adjust the relationship between the supply and demand for money. The demand for money continues to rise as the economy grows. To prevent inflation, the central government raises the money supply proportionately to the rise in demand.

Types of Monetary Policy

Monetary policies are viewed as either expansionary or contractionary depending on how much the economy is growing or stagnating. The types of monetary policy are explained below.

Expansionary Monetary Policy

Expansionary monetary policy is implemented when the central bank seeks to stimulate economic growth and increase aggregate demand. The key tools used in the expansionary monetary policy include:

• Lowering interest rates: By reducing key interest rates, such as the central bank’s policy rate or the overnight lending rate, the central bank aims to make borrowing cheaper, incentivizing businesses and individuals to borrow and spend more.
• Open market operations: The central bank buys government securities, such as Treasury bonds, from the market, injecting money into the economy and increasing the money supply. This helps lower interest rates and stimulates lending and investment.
• Reserve requirement reductions: The central bank can lower the reserve requirement, which is the amount of reserves that banks must hold against customer deposits. By reducing this requirement, banks have more funds available for lending, promoting economic activity.
• Quantitative easing: In extraordinary circumstances, such as during a financial crisis or severe recession, the central bank may undertake quantitative easing. This involves large-scale purchases of long-term government bonds or other assets from financial institutions to inject liquidity and stimulate lending.

Contractionary Monetary Policy

A contractionary monetary policy is implemented when the central bank aims to reduce inflationary pressures and cool down an overheating economy. The key tools used in the contractionary monetary policy include:

• Raising interest rates: By increasing key interest rates, the central bank makes borrowing more expensive, discouraging spending and investment and reducing inflationary pressures.
• Open market operations: The central bank can sell government securities to the market, thereby reducing the money supply and increasing interest rates.
• Reserve requirement increases: The central bank can raise the reserve requirement, forcing banks to hold more reserves against customer deposits. This reduces the amount of money available for lending and restricts credit growth.
• Sterilization operations: When the central bank intervenes in foreign exchange markets to prevent excessive currency depreciation or appreciation, it may engage in sterilization operations. These operations help offset the impact of foreign exchange interventions on the money supply.

Central banks have the flexibility to adjust these policies based on the prevailing economic conditions and policy objectives. The specific combination of tools used will depend on the central bank’s assessment of the economic situation and its desired outcomes.

Limitations of Monetary Policy

One of the major limitations of the Monetary Policy is that it is not able to concentrate on the non-monetary aspects of the economy. There are other factors as well that control the country’s economic growth apart from the monetary front. Some other limitations of the Monetary Policy in India are given below:

• Limited contribution with respect to the economic growth of the country.
• Less involvement in the controlling of commodity prices.
• The Monetary Policy is not able to encourage a cashless economy & increase the deposit of the banks as the Indian people are more interested in cash transactions.
• Another major limitation of the Monetary Policy in India is that the money market is not so much developed which plays a negative role in the functioning of the economy.

Fiscal Policy vs Monetary Policy

Fiscal Policy and Monetary Policy are two kinds of financial tools that are brought into use by the concerned financial organizations & the government. They both are crucial for the growth of the economy.

Fiscal Policy	Monetary Policy
This tool is utilized by the Central government.	It is used by the Central Bank- the Reserve Bank of India.
Controls the money being circulated in the revenue collected from taxes & the financial policies that are related to the spending & expenditure for the economy.	Regulates the money supply & interest rates of the bank.
Dedicated towards the growth of the economy.	Focused more towards stabilizing the economy.

Monetary Policy UPSC

Monetary Policy UPSC is an essential topic from the Indian Polity subject, and it is important for both UPSC Prelims and Mains exams. All aspirants must have knowledge and information about the details of the Monetary Policy according to the UPSC Syllabus and should know every small detail related to the latest updates on the RBI monetary policy 2023 for excellent preparation and results. They can also go through UPSC previous year question papers to understand the types of questions asked in this section.

Monetary Policy UPSC Questions

Question 1: Which of the following is not a tool of monetary policy in India? – (a) Repo Rate, (b) Cash Reserve Ratio, (c) Foreign Direct Investment (FDI), (d) Open Market Operations

Answer: c) Foreign Direct Investment (FDI)

Question 2: What is the primary objective of monetary policy in India? – (a) Promoting economic growth, (b) Maintaining price stability, (c) Controlling fiscal deficit, (d) Regulating foreign exchange reserves

Answer: b) Maintaining price stability

Question 3: Which committee is responsible for formulating monetary policy in India? – (a) Fiscal Policy Committee, (b) Financial Stability Committee, (c) Monetary Policy Committee, (d) Economic Advisory Committee

Answer: c) Monetary Policy Committee

Question 4: Which of the following tools is used to manage short-term liquidity fluctuations in the banking system? – (a) Repo Rate, (b) Cash Reserve Ratio, (c) Statutory Liquidity Ratio, (d) Liquidity Adjustment Facility

Answer: d) Liquidity Adjustment Facility

Question 5: What is the impact of increasing the Cash Reserve Ratio by the RBI? – (a) Decreases liquidity in the banking system, (b) Increases liquidity in the banking system, (c) Reduces interest rates, (d) Stimulates economic growth

Answer: a) Decreases liquidity in the banking system

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