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Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. In addition, monetary policy is also useful as it has an indirect impact on other indicators of the Economy, primarily, economic growth and employment.
The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the monetary policy framework of the country. The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or around the repo rate. Repo rate changes transmit through the money market to the entire the financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth.
Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. The MPC determines the policy interest rate required to achieve the inflation target.
There are several direct and indirect instruments that are used for implementing monetary policy. Most important ones being:
The Monetary policy has worked well in India and has played a significant role in controlling inflation levels, Giving more autonomy to the RBI's MPC will further strengthen the policy framework in India,
By: Priyank Kishore ProfileResourcesReport error
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