Critically analyse the monetary policy adopted by Reserved Bank Of India
Monetary policy of RBI: Objectives:
The monetary policy of the Reserve Bank of India (RBI) seeks to help in achieving the national objectives of economic growth with equity and price stability. It is designed to make available adequate supply of credit for investment in diverse fields of economic activity. It seeks to reduce the cost of credits an incentive for greater use of bank finance in development process. But since the excess supply of credit (money) can cause inflation, the RBI is also concerned with control of inflation and ensure a reasonable degree of price stability.
Thus the monetary policy of the RBI seeks to promote economic development through expansion of credit and its availability at low cost. It seeks to achieve price stability and ensure equity by using instruments of credit control that can prevent excess liquidity and unreasonable rise in price level.
Instruments of Credit Control:
Variations in reserve requirements i.e. cash reserves and statutory liquidity ratio;
Variations in the cost and availability of Reserve Bank's accommodation to banks;
Changes in the deposit and lending rates of the banks;
Selective credit control; and
Quantitative guidelines on credit expansion.
Evaluation:
Monetary policy of the RBI has ensured that adequate credit support is available to various sections of the economy. The pursuit of socio-economic objectives by the RBI's monetary policy has enabled large sections of people acquire considerable access to the bank credit.
Review of RBI's Monetary Controls:
1951-60:
Since the establishment of the Reserve Bank India in 1935 until 1951, the monetary policy was activated in 1951. Bank rate was raised for the first time from 3% to 5%. Open market sale policy was followed which resulted in a fall in the prices of gilt-edged securities and a rise in their yields.
This led to a monetary contraction and decline in the general price level. The wholesale price index declined by 12.8% in four years partly due to good harvests. To reverse this trend, easy money policy was followed for a year or two. But when the price level increased by 14% in 1956-57. the RBI raised the Bank rate from 3.5% to 4%. By and large, the monetary policy had remained independent during the 1950s. This decade witnessed price stability.
Write a short Note on Future Reforms:
Following are certain macroeconomic reforms awaiting clearance from the government.
Extending Reforms to Non-Economic Realm:
Reforms must go Levand economic realm and cover such areas as general elections, and trade union and industrial relations.
Ensuring Macroeconomic Stability:
This involves mainly fiscal balance and current account balance. This is necessary to ensure low rate of inflation.
Fiscal Policy:
Reforms in fiscal areas should cover at least three areas:
(a) Reduction in government expenditure, (b) higher and more effective direct taxation of the rich, and (c) effective collection of taxes from those who evade the income tax.
Agricultural Reforms:
Reforms in agriculture must include
Raising public investment
Reducing farm subsidies
Explorations of new technologies
Programmes for boosting dry land farm output and employment
Reforming rural credit institutions
Decentralised management of agricultural infrastructure
Need for Strategic Planning:
The questions relevant in this context we Where should Indian industry be 10 or 15 years hence? Where will be the export markets? What to do to reach them? What should be the 7 respective roles of public and private sectors? These issues must be addressed by the government, industry, labour and the academia.
Initiatives on Internal and External Debt:
The growth of internal debt needs to be checked and that of the external debt must be moderated. Infarct, there is a need for a constitutional limit on internal borrowings. Receipts from privatization of PSUs may be used to retire internal debt. Preventing the growth of external debt is also important.