Monetary Policy Trends

August 15, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

Monetary Policy Trends

Subject : Economy

Section: Fiscal Policy

Context: As the institutional environment, both domestic and global, changes, the tasks of monetary policy also change.

Details:

The Reserve Bank of India was set up as a central monetary authority in 1935.
Like all central banks in developing economies, RBI has been playing both a developmental and a regulatory role.
- In its developmental role, RBI focused on creating an appropriate financial infrastructure in the country.
The evolution of India’s monetary policy by the RBI reflects the changing concerns over the last seven decades.

Period	Government policy	Monetary policy objectives and instruments	Monetary-Fiscal conflict
First three decades after Independence (1947-1970s)	Implementation of five year plans	Non-inflationary deficit financing and Judicious credit creation to increase production and investment. The role of the Reserve Bank was to abide by the larger concerns of the government.	No conflict till inflation was moderate. In the 1950s- the average annual inflation in the wholesale price was 1.8 per cent. In the 1960s- it was 6.2 per cent. In the 1970s- double-digit, and the growth of money supply had to be reduced- led to conflict with easy credit creation to finance the deficit.
1980s	Implementation of five year plans	The Chakravarty Committee– look into the working of the monetary system, submitted its report in 1985: regulation of money supply and consistent with real growth and an acceptable level of inflation. need for close coordination between monetary policy and fiscal policy The 1980s still saw a higher fiscal deficit and higher money supply growth leading to the crisis of 1991.
1990s	Economic Reforms -LPG	Price stability and growth have always remained the major objectives of monetary policy. RBI shifted to a multiple indicator approach to fulfill its objectives. ad-hoc treasury bills no longer issued the automatic monetisation of fiscal deficit ended market-determined rate of interest-The dismantling of the administered structure of interest rate helped the rate of interest to emerge as a policy tool government securities became marketable, leading the emergence of open-market operations as an instrument of credit control. Intervention by RBI in forex market as India shifted to market determined exchange rate: Protecting the exchange value of the rupee through intervention in the domestic and international market. Maintaining the real effective exchange rate given changing inflation rate Management of capital inflows and outflows Financial stability had emerged as an important objective of monetary policy. RBI, played a dual role — monetary policy authority; and regulator of banking and non-banking systems.
Post 2015	NITI Ayog and Indicative Planning	Flexible inflation targeting with growth a no less important objective The new monetary policy framework requires RBI to maintain consumer price inflation at 4 per cent with a margin of plus- or minus-2 percent.

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