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According toProf.

Harry Johnson,
"A policy employing the central banks control of the supply of money as an instrument for
achieving the objectives of general economic policy is a monetary policy."

According toA.G. Hart,

"A policy which influences the public stock of money substitute of public demand for such
assets of both that is policy which influences public liquidity position is known as a monetary

From both these definitions, it is clear that a

monetary policy is related to the availability
and cost of money supply in the economy in
order to attain certain broad objectives. The
Central Bank of a nation keeps control on the
supply of money to attain the objectives of its
monetary policy.

Objectives of Monetary Policy :The objectives of monetary policy differ from country to country according to their economic conditions. In the less
developing countries like India or Pakistan its objective may be the maintenance of monetary stability and help in the
process of economic development. In the developed countries its objective may be to achieve full employment, without
inflation. Anyhow following are the main objectives of the monetary policy.
1. Control of Inflation and Deflation :Inflation and deflation both are not suitable for the economy. If the price level is reasonable and there is an adjustment
between the price and cost, rate of out put can increase. Monetary policy is used to coordinate the cost and price. So price
stability is achieved through the monetary policy.
2. Exchange Stability :Monetary policy second objective is to achieve the stable foreign exchange rate. If the rate of exchange is stable it shows
that economic condition of the country is stable.
3. Economic Development :Monetary policy plays very effective role in promoting economic growth by providing adequate credit to productive sectors.
4. Increase in the Rate of Employment :Monetary policy another objective is to achieve full employment but withoutinflation.
5. Equal Distribution of Credit :Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should
be given to backward areas.
6. Improvement in Standard of Living :It is also the major objective of the monetary policy that it should improve the quality of life in the country.


Quantitative measures

Bank rate
Open market operations
Cash reserve ratio (CRR)
Statutory liquidity ratio (SLR)

Qualitative Measures

Rationing of credit
Moral Suasion
Direct Action
Regulation in consumer credit
Changes in margin requirements

Quantitative credit control

Bank rate
Bank rate is the rate, which the central bank
charges for giving loans and accommodation to the
commercial banks.
Open market operations
Deliberate purchase and sale of government
securities in the money market by the central bank,
with the objective of expansion or contraction of
credit and general economic activity

Quantitative credit control

Reserve requirements
In view of safety and liquidity, the commercial
banks are legally required to keep a part of their
total demand and time deposit as reserve. By
raising the reserve ratio to be maintained by every
bank, the central bank can reduce the volume of
Cash reserve ratio: Minimum cash reserve which
the banks are required to keep with the central
Statutory liquidity ratio: Minimum amount of
liquidity, which the banks are required to keep with

Qualitative credit control

Margin requirement
The central bank can order the commercial banks to
lend an amount lower than the volume of a security.
A higher margin used during inflationary situation
will reduce the amount of loan given by the banks.
Rationing of credit
Credit rationing is a method of controlling and
regulating the purpose for which the banks grant
Regulation of consumer credit
The central bank can regulate the terms and
conditions under which consumer credit is to be
given by the banks

Qualitative credit control

Differential rate of interest
Under this scheme the central bank fixes up different
rates on interest to be charged by the banks from
different borrowers who borrow for different purposes
Moral suasion
It implies persuasion and request made by the central
bank to commercial banks to follow the general policy
of central bank
Direct action
Direct action refers to all the controls and directions,
which the central bank may enforce on all banks or any
bank in particular concerning lending and investment

CRR By increasing the CRR, the RBI decreases the

lending capacity of the bank to the extent of the
increase in the ratio.
E.g of the CRR is increased from 7.5% to 8.5%
the banks were deprived of lending to the
extent of 75 basis points of their deposit value.

Increase OR Decrease the lending

The RBI makes an adjustment in its lending
rate(Repo Rates) in order to influence the cost
of credit. Thereby discouraging borrowing and
hence reduces brings reduction in the system.

Obstacles In Implementation of
Monetary Policy
Through the monetary policy is
useful in attaining many goals of
economic policy, it is not free from
certain limitations


Time Lag Affects Success of Monetary Policy- The success of the

monetary policy depends on timely implementation of it. However, in many cases
unnecessary delay is found in implementation of the monetary policy. Or many times
timely directives are not issued by the central bank, then the impact of the monetary
policy is wiped out.

Existence of Unorganized Financial Markets- The financial markets help in

implementing the monetary policy. In many developing countries the financial
markets especially the money markets are of an unorganized nature and in backward
conditions. In many places people like money lenders, traders, and businessman
actively take part in money lending. But unfortunately they do not come under the
purview of a monetary policy and creates hurdle in the success of a monetary policy.

There exist a Non-Monetized Sector-In many developing countries, there is

an existence of non-monetized economy in large extent. People live in rural areas
where many of the transactions are of the barter type and not monetary type.
Similarly, due to non-monetized sector the progress of commercial banks is not
up to the mark. This creates a major bottleneck in the implementation of the
monetary policy

Current Rates