The main features of the monetary policy of the Reserve Bank of India are given below:
1. Active Policy:
Before the advent of planning in India in 1951, the monetary policy of the Reserve Bank was a passive, cheap and easy policy. It means that Reserve Bank did not use the measures of monetary policy to regulate the economy.
For example from 1935 to 1951, the bank rate remained stable at 3%. But since 1951, the Reserve Bank has been following an active monetary policy. It has been using all the measures of credit control.
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2. Overall Expansion:
An important feature of Reserve Bank’s monetary policy is that of overall expansion of money supply. In the words of S.L.N. Sinha ‘ The Reserve Bank’s responsibility is not merely one of credit restriction.
In a growing economy there has to be continuous expansion of money supply and bank credit and the central bank has the duty to see that legitimate credit requirements are met’. In fact, the overall, trend of money supply has been one of the expansions along with an almost continuous rise in price level.
3. Seasonal Variations:
The monetary policy is characterised by the changing behaviour of busy and slack seasons. These seasons are tied to the agricultural seasons. In the busy season there is an expansion of funds on account of the seasonal needs of financing production, and inventory building of agricultural commodities.
On the other hand, the slack season is characterised by the contraction of funds due to the return flow. It may be pointed out that aggregate contraction of funds during the slack season has tended to fall far short of expansion in the preceding busy season.
The main reason behind this changing pattern is the requirement of additional funds by the industrial sector. Thus, during busy season the Reserve Bank adopts an expansionary credit policy and tightens the liquidity pressures during the slack season.
4. Tight and Dear Monetary Policy:
In order to restrain inflation the Reserve Bank has often adopted a tight and dear monetary policy. A tight monetary policy implies that the rate of growth of money supply is lowered. A dear money policy refers to increase in bank rate. This increase in bank rate leads to an increase in the interest rates charged by the banks.
5. Investment and Saving Oriented:
The monetary policy adopted by the Reserve Bank is both investment and saving oriented. To encourage investment, adequate funds were made available for productive purposes at reasonable rates of interest. The Reserve Bank has also kept the interest on deposits at a reasonable rate to attract savings.
6. Imbalance in Credit Allocation:
The monetary policy is biased towards industrial sector. Agriculture does not get the required institutional finances. Consequently, it has to depend upon money lenders to a considerable extent for its credit needs.
The agricultural sector has to pay high rate of interest and even then does not get required amount of capital. A large part of funds flows to large industries. Even small scale industries suffer from the inadequacy of finances. Thus monetary policy has resulted in imbalances in credit allocation.
7. Wide Range of Methods of Credit Control:
The Reserve Bank has used a wide range of instruments of credit control. It has adopted all the measures of quantitative and qualitative credit controls to meet the needs of a complex and varying economic situation.
Since the objective has been to achieve economic growth with stability, the policy of monetary management has gone beyond the traditional regulatory function. It has adopted a more positive role of channeling credit to desired sectors.
8. Guiding Factors:
According to Shri. C. Rangarajan the following three factors have essentially guided the conduct of monetary policy:
(i) Monetary policy measures have generally been a response to fiscal policy.
(ii) While monetary policy has been primarily acting through availability of credit, the cost of credit has also been adjusted upwards sometimes very sharply to meet effectively the inflationary situations.
(iii) The areas of operation of monetary policy did not remain confined to those related to regulation of monetary authority in the allocation of credit to the non-Government sector because of an important element of national economic policy, specially after the nationalisation of banks.