Objectives of Monetary Policy of India

Objectives of Monetary Policy of India

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1. Economic growth

Economic growth refers to a process whereby an economy’s real national income increases over a given period of time.

By increase in real national income, we mean more availability of goods and services in a country during a given period of time.

Monetary policy can step up the rate of economic growth by

a) encouraging investment in productive activities by lowering the interest rates

[Since the cost of money is lowered, firms can now borrow money from banks at a lower price (lower interest rates). Also it reduces the saving rate of the economy, since now the people do not have an incentive to save their money in the banking system due to a lower interest rate. Consumer purchases for durable goods increase.]

b) discouraging investment in less productive activities by increasing the interest rates

[An increase in interest rates reduces the level of investment (purchase of capital goods) in the economy, since the cost of the money is increased, firms can now borrow money from banks at a higher price (higher interest rates). Also it increases the saving rate of the economy, since now the people have an incentive to save their money in the banking system because of the expectation of receiving a greater amount of money in a given period of time, due to a higher interest rate. Additionally, consumer purchases for durable goods that are purchased on credit (such as houses and automobiles) are reduced when interest rates rise. ]

c) promoting development of banking as well non-banking financial institutions

d) Bringing non-monetized sectors of the economy under the banking system

Price stability

Price stability may be defined as a situation in which prices in an economy increase a little over time. ( do not change much). Huge variations in price can lead to inflation or deflation.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time....