What does it Mean to Tighten Monetary Policy?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

The Tighten Monetary Policy means that the central bank increases interest rates and reduces the money supply. The monetary policy of the central bank is tightened when there is unchecked economic growth. Monetary tightening is another name for contractionary monetary policy. When inflation is rising quickly, monetary policy is tightened.

Tighten Monetary Policy

Monetary policy is adopted by a country’s monetary authority, which controls either the interest rate payable on a very short-term loan or the money supply in the banking system. The minimum reserve requirements for banks are raised as a result of this policy, and government securities are also sold.

  • Policy often targets inflation or the interest rate to ensure price stability and create confidence in the currency.
  • Monetary policy in India is conducted under the supervision of the Reserve Bank of India.

Objectives of Tightening Monetary Policy

  • Simply put, maintaining price stability while keeping in mind the need for growth is the primary objective of monetary policy, as price stability is a requirement for long-term economic growth.
  • Through a consultative process on inflation targeting, the RBI in India is crucial to containing inflation. India’s current framework for aiming for inflation is adaptable.

Role of the Monetary Policy Committee

  • The Finance Act 2016 amended the Reserve Bank of India Act 1934 (RBI Act) to offer an institutionalized and statutory framework for the Monetary Policy Committee to maintain price stability along with the growth objective.
  • The Monetary Policy Committee sets the reference interest rate (repo rate) needed to keep inflation within the target level.
  • The Indian Government announced the “inflation target” in the Gazette of India on August 5, 2016, for the period commencing from the publication of the notification date and ending on 31 March 2021 as 4%.
  • The lower and upper tolerances of 2% and 6% were announced.


What does it Mean to Tighten Monetary Policy?

Monetary policy tightening is done when inflation is rising rapidly. The central bank tightens monetary policy by raising interest rates and decreasing the money supply available to the banking sector. It is typically used during periods of strong economic growth and rising inflationary pressures.

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