A macroeconomic policy established by central bank is defined as Monetary Policy. To manage the macroeconomic objectives such as inflation, growth, consumption and liquidity government of the country uses interest rates
and management of money supply and demand side of economic policy.
The lending interest rates and liquidity are important for pillars of monetary policy which determines the demand side of business environment of the country which is handled by Reserve bank of India (RBI), an government body.
Monetary policy is managed through actions of changing interest rates, changing bank reserves, and by buying and selling government bonds to increase or decrease liquidity in the system.
Expansion of liquidity by reducing interest rates (Repo rates) via monetary policy helps in lowering unemployment, boosts consumer spending, private sector borrowing and stimulate economic growth.
while there is excess liquidity in the economic system and in an inflationary environment central bank curbs the liquidity by raising the interest rates (Repo Rates).
The key objectives of Monetary policy include:
Price stability
Promotion of Fixed Investment
Controlled expansion of Bank credit
Restriction of inventories and stocks
To promote effecieny
Reduce the rigidity
In our next free educational series, we would discuss on ‘Inflation’.
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