The Reserve Bank of India drafts the Monetary Policy, which influences interest rates, the availability of credit, business operations, and growth opportunities. It is derived from financial instruments and mechanisms. In this article, we cover what monetary policy is, its objectives, types, and how it is implemented.
Monetary policy is part of a macroeconomic government policy drafted by the Reserve Bank of India. This policy covers measures taken to regulate the volume of credit created by the banks, the use of monetary instruments under the control of the central bank to achieve price stability, financial stability, and adequate availability of credit for growth. With greater digitalisation, individuals can also open a bank account online to access credit and banking services more easily, aligning with the RBI’s broader objective of financial inclusion.
The primary objectives of monetary policy are:
Price Stability – Keeping the general price level low and stable to preserve the currency’s purchasing power. Instability in prices creates uncertainty, discourages investment, and hinders sustainable economic growth. This is achieved by controlling inflation through setting interest rates and managing the money supply.
Full Employment – High unemployment can lead to economic instability and hardship for individuals. Monetary policy aims to reduce the level of unemployment by stimulating investment and production, which creates more jobs.
Economic Growth - Fostering sustainable, long-term economic expansion and development by ensuring sufficient availability of credit and money to key sectors of the economy.
Financial Stability – The RBI, through its monetary policy, works to maintain stability in financial markets, preventing systemic risks and supporting resilience in times of crisis.
Exchange Rate and External Value – The policy framework also involves stabilizing the external value of the rupee and facilitating stable foreign exchange conditions within the broader goal of macroeconomic stability.
RBI drafts two types of monetary policy: Expansionary Monetary Policy and Contractionary Monetary Policy.
Also referred to as Monetary Policy, the objective of Expansionary Monetary Policy is to increase the money supply in the economy through measures such as:
This policy is used to decrease the amount of money supply in the economy through measures such as:
RBI uses different tools to draft the monetary policy to control the money supply, which can be categorized into two categories:
The Monetary Policy Committee (MPC), set up in 2016 under the RBI Act, is a statutory body that decides India’s benchmark interest rates. Its core mandate is to maintain price stability (inflation target of 4% ±2%) while fostering economic growth.
The MPC has six members: three from the RBI and three external experts appointed by the Central Government.
Decisions require a majority vote with at least four members present. Minutes of each meeting are published for public record.
Once the Monetary Policy Committee finalises its decision, the RBI follows a structured process to implement it:
The Reserve Bank of India, through its monetary policy, balances price stability with economic growth. As global and domestic conditions evolve, the Monetary Policy Committee will remain central to decision-making. For individuals, staying resilient during such shifts also means building a strong financial base. Choosing a DBS Bank Savings Account can help manage funds efficiently while the RBI works to ensure long-term financial stability.
