2.3. Objectives

Traditionally, there have been varying objectives of monetary policy in different countries in different times and in different economic conditions. The proper objective of the monetary policy is to be selected by the monetary authority keeping in view the specific conditions and requirements of the economy. For developing countries like India its objective may be the maintenance of monetary stability and helping in the process of economic development. In developed countries its objective may be to achieve full employment, without inflation.

Some of the objectives of monetary policy are listed as below:

a) Economic growth: The monetary policy can influence economic growth by controlling real interest rates and its resultant impact on the investment. If the RBI opts for a cheap credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth.

b) Price Stability: In current regime of Monetary Policy Committee, it is the primary objective of monetary policy in India. Price stability is defined as a low and stable order of inflation. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. For developed countries, such an inflation threshold is considered to be around 2 percent which could be higher for developing countries depending on their stage of economic development. A number of prominent central banks including the European Central Bank, Bank of England and Bank of Japan have adopted price stability as the single objective of monetary policy. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'.

c) Exchange Rate Stability: If exchange rate of an economy is stable it shows that economic condition of the country is stable. Monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability.

d) Generating Employment: Monetary policy can be used for generating employment. If the monetary policy is expansionary then credit supply can be encouraged. It would thus help in creating more jobs in different sector of the economy.

e) Equal income distribution: Earlier, many economists used to justify the role of the fiscal policy in maintaining economic equality. However, in recent years economists have given the opinion that the monetary policy can play a supplementary role in attainting economic equality. Monetary policy can make special provisions for sectors such as agriculture, small- scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Additionally, the monetary authority can help in establishment and expansion of banks and institutions in rural and backward areas of the country. Thus in recent times, the role of monetary policy in reducing economic inequalities has been greatly enhanced.

In India, as defined by former RBI governor C. Rangarajan, broad objectives of monetary policy are:

a) To regulate monetary expansion so as to maintain a reasonable degree of price stability; and

b) To ensure adequate expansion in credit to assist economic growth.