OBJECTIVES OF MONETARY POLICY

Broadly speaking, following are the main objectives of monetary policy1. Economic growth 2. High rate of employment 3. Stabilization of prices,output and employment 4. economic equity 5. Neautrality of money 6. Stabilizing balance of payments 7. Equal Income distribution We shall now discuss in brief such one of the above objectives of monetary policy.

1.Economic growth
Achieving and maintaining a high growth rate has been accorded a top priority in the economic agenda of most nations-rich and poor.Also,the emphasis on a reasonably high growth rate in accordance with growth potentials of the nation has increased tremendously over the past half a century.To quote Samuelson again, Economists and politicians from all nations, rich and poor, capitalist, socialist, and mixed, have worshipped at the shrine of economic growth. The reasons for predominance of growth objective are: (i)The level of economic growth determines the level of fullfilment of social and economic aspirations of the people. (ii) it insures the very survival of a country as a free and independent nation. (iii) it determines the capability of a nation to defend its borders and sovereignty. (iv) it determines the respect and honour a country receives in the world community. (v) it is the only way of creating job for unemployed and eradicating poverty. (vi) it helps maintaing peace and preventing a possible disintegration of the nation.for these reasons, a reasonably high growth rate (5-6% p.a.) is viewed as an indispensable economic and political objective of most nations. In recent times, however, especially during the 1970s, there has been a remarkable change in the private and public perception of economic growth and economic well-being of the people.there is growing disillusionment in both the rich and poor nations regarding the relentless pursuit of growth being the principal economic objective of society. The experience of mainy developing countries show that growth does not necessarily improve the quality of life, social relationships, economic condition of the poor. Economic growth in Africa, Asia and Latin America has left millions untouched from the benefits of growth over the past half-a-century. Therefore,emphasis has shifted from growth to eradiction of poverty and economic equality.

2. High rate of Employment

Achieving and maintaining full employment has been one of the major objectives of monetary policy.Keynes is regarded as the first economist who emphasized the need for full employment and a justification for making it a macroeconomic target. According to him, one of the outstanding faults of the economic society in which we live is its failure to provide full employment. Full employment is defined variously. Keynes defined full employment as a situation in which aggregate employment is inelastic in response to increase in the effective demand. UN Experts on national and international measures of full employment, define full employment more meaningfully as a situation in which employment cannot be increased by an increase in effective demand and unemployment does not exceed the minimum allowance that must be made for effects of frictional and seasonal factors.the desirability of full employment as an objective of monetary policy lies in the social benefits of employment in terms of additional output lost due to unemployment, apart from social and economic misery and mental agony suffered by the unemployed. The employment objective is congruent with growth objective. Generally,they go hand in hand. However,during and the post-War II period,the economists and economic advisors entrusted the government with the responsibility of creating additional job opportunities and maintaining high level of employment.

3. Stabilization of prices, Output and Employment

Price stabilization was the foremost objective of monetary policy of the industrialised countries during and after the Great Depression. Economists like Gurstave Cassel and Keynes argue that domesic price stability should be the main objective of central banks monetary policy.Violent fluctuation in prices create the problem of inflation and deflation which cause enormous hardships to consumers,mage earners and other factor owners. Both post war inflation and great depressions of 1930s convinced the economists that the objective of monetary policy should be the stabilization of the exchange rates.price stability as an objective of monetary policy does not mean maintaining price index at a constant level. Some authors define price stability as stability of some appropriate price index in the sense that we can detect no definite upward trend in the index after making proper allowance for the upward bias inherent in all price index. Besides , a moderate rate of inflation is considered to be desirable. Therefore ,from practical point of view,price stabilization objective may mean preventing price rise in excess of its desirable limits, that is, 2-3% in DCs and 4-5% in LDCs. In effect ,however,price stabilization means preventing violent fluctuations in the price level.

4. Econonomic Equity
The experience of both the developed and developing economies shows that economic growth of a country does not necessarily promote economic well being of all its people. More importantly, growth has been generally accompanied by the growth in income inequalities marked with affluence of a section of the society and abject poverty of the rest of the society. Income inequality puts a limit to overall economic growth of the country by limiting the market size. So economic equity has become as one of the objectives of monetary policy.

5. Neautrality of Money
Prof. Hayek and some other economists belonging to the Austrian School have emphasized upon the neutrality of money as the objective of monetary policy. The neutral money policy is based upon the assumption that money should only pay the role of medium of exchange and should not work as a measure of value. In other words, the money supply should be regulated in such a manner that it may not affect the output, price, employment etc. it is only by keeping the supply of money as constant that it can play a neutral role. Economist such as Wicksted, Robertson have always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability.

6. Stabilizing Balance of Payments

The phenomenal growth in the foreign trade in the post war II period and a relatively slow growth of international liquidity (the means of external payments) led to disequilibrium in the balance of payments position in many countries. The problem aggravated due to protectionist policy, competitive devaluation and countervailing tarrifs and other trade restrictions. Therefore, maintaining a satisfactory, maintaining a satisfactory balance of payments position has been accepted as one of the important objectives of the monetary policy since the 1950s. Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

7. Equal Income Distribution

Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in resent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. monetary policy can make special provisions for the neglect supply 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. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society.

ROLE OF MONETARY POLICY IN A DEVELOPING ECONOMY

The monetary policy in a developing economy will have to be quite different from that of a developed economy mainly due to different economic conditions and requirements of the two types of economies. A developed country may adopt full employment or price stabilisation or exchange stability as a goal of the monetary policy. But in a developing or underdeveloped country, economic growth is the primary and basic necessity. Thus, in a developing economy the monetary policy should aim at promoting economic growth, the monetary authority of a developing economy can play a vital role by adopting such a monetary policy which creates conditions necessary for rapid economic growth. Monetary policy can serve the following developmental requirements of developing economies.

1. Developmental Role:
In a developing economy, the monetary policy can play a significant role in accelerating economic development by influencing the supply and uses of credit, controlling inflation, and maintaining balance of payment. Once development gains momentum, effective monetary policy can help in meeting the requirements of expanding trade and population by providing elastic supply of credit.

2. Creation and Expansion of Financial Institutions:

The primary aim of the monetary policy in a developing economy must be to improve its currency and credit system. More banks and financial institutions should be set up, particularly in those areas which lack these facilities. The extension of commercial banks and setting up of other financial institutions like saving banks, cooperative saving societies, mutual societies, etc. will help in increasing credit facilities, mobilising voluntary savings of the people, and channelising them into productive uses. It is also the responsibility of the monetary authority to ensure that the funds of the institutions are diverted into priority sectors or industries as per requirements of are development plan of country.

3. Effective Central Banking:

To meet the developmental needs the central bank of an underdeveloped country must function effectively to control and regulate the volume of credit through various monetary instruments, like bank rate, open market operations, cash-reserve ratio etc. Greater and more effective credit controls will influence the allocation of resources by diverting savings from speculative and unproductive activities to productive uses.

4. Integration of Organised and Unorganised Money Market:

Most underdeveloped countries are characterized by dual monetary system in which a small but highly organised money market on the the one hand and large but unorganised money market on the other hand operate simultaneously. The unorganised money market remains outside the control of the central bank. By adopting effective measures, the monetary authority should integrate the unorganised and organised sect ors of the money market.

5. Developing Banking Habits

The monetary authority of a less developed country should take appropriate measures to increase the proportion of bank money in the total money supply of the country. This requires increase in the bank deposits by developing the banking habits of the people and popularising the use of credit instruments (e.g, cheques, drafts, etc.).

6. Monetisation of Economy:
An underdeveloped country is also marked by the existence of large non-monetised sector. In this sector, all transactions are made through barter system and changes in money supply and the rate of interest do not influence the economic activity at all. The monetary authority should take measures to monetise this non-monetised sector and bring it under its control.

7. Integrated Interest Rate Structure:

In an underdeveloped economy, there is absence of an integrated interest rate structure. There is wide disparity of interest rates prevailing in the different sectors of the economy and these rates do not respond to the changes in the bank rate, thus making the monetary policy ineffective. The monetary authority should take effective steps to integrate the interest rate structure of the economy. Moreover, a suitable interest rate structure should be developed which not only encourages savings and investment in the country but also discourages speculative and unproductive loans.

8. Debt Management:
Debt management is another function of monetary policy in a developing country. Debt management aims at (a) deciding proper timing and issuing of government bonds, (b) stabilising their prices, and (c) minimising the cost of servicing public debt.

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The monetary authority should conduct the debt management in such a manner that conditions are created "in which public borrowing can increase from year to year and on a big scale without giving any jolt to the system.

And this must be on cheap rates to keep the burden of the debt low."However, the success of debt management requires the existence of a well- developed money and capital market along with a variety of short- term and long-term securities.

9. Maintaining Equilibrium in Balance of Payments:

The monetary policy in a developing economy should also solve the problem of adverse balance of payments. Such a problem generally arises in the initial stages of economic development when the import of machinery, raw material, etc., increase considerably, but the export may not increase to the same extent. The monetary authority should adopt direct foreign exchange controls and other measures to correct the adverse balance of payments.

10. Controlling Inflationary Pressures

Developing economies are highly sensitive to inflationary pressures. Large expenditures on developmental schemes increase aggregate demand. But, output of consumer's goods does not increase in the same proportion. This leads to inflationary rise in prices. Thus, the monetary policy in a developing economy should serve to control inflationary tendencies by increasing savings by the people, checking expansion of credit by the banking system, and discouraging deficit financing by the government.

11. Long-Term Loans for Industrial Development:

Monetary policy can promote industrial development in the underdeveloped countries by promoting facilities of medium-term and longterm loans to the manufacturing units. The monetary authority should induce these banks to grant long-term loans to the industrial units by providing rediscounting facilities. Other development financial institutions also provide long-term productive loans.

12. Reforming Rural Credit System:

Rural credit system is defective and rural credit facilities are deficient in the underdeveloped countries. Small cultivators are poor, have no finance of their own, and are largely dependent on loans from village money lenders and traders who generally exploit the helplessness, ignorance and necessity of these poor borrowers. The monetary authority can play an important role in providing both short-term and long term credit to the small arrangements, such as the establishment of cooperative credit societies, agricultural banks etc.

IMPACT OF MONETARY POLICY ON ECONOMY

Monetary policy is the regulation of a country's money supply by the central bank of a country or region. In the United States, the central bank is the Federal Reserve Board. Monetary policy tools are used to help control the economy. The primary tools used by a central bank are changes to the prime interest rate, changes to the amount of money in circulation and changes in the reserve requirements for banks.

Control Inflation
One of the primary impacts of monetary policy is on inflation. The goal of monetary policy is to control inflation, or the value of currency, through changes in monetary policy tools. When inflation rises, the central bank typically raises interest rates. High inflation makes the costs of goods higher. Central banks want to keep inflation low to keep the prices of goods stable relative to the value of the currency

Interest Rates
Monetary policy directly impacts interest rates. The central bank raises or lowers the prime rate, or interest rate the central bank loans money to other banks, as a tool to impact the economy. These actions have a trickle down effect on the interest rates charged on loans, credit cards and any other financial vehicle that is tied to the prime rate.

Business Cycles
Business is cyclic in nature and goes through periods of expansion and contraction. Monetary policy attempts to minimize the speed and severity of these expansions and contractions to maintain steady growth or decrease a negative contraction. The goal is to keep an economy on a slow, but steady growth pattern to prevent recessions during periods of contraction.

Spending
Monetary policy impacts the amount of money spent in an economy. When a central bank decreases interest rates, more money is typically spent in an economy. This increase in spending can equate to better overall health for an economy. Likewise, when interest rates are increased, spending declines, which could curtail inflation.

Employment
Employment levels relate to the health of an economy. When inflation is low and an economy is stable or in an expansionary phase, employment levels are higher than when inflation is high and an economy is in a contraction phase. Changes in monetary policy that maintain economic stability and minimize inflation, tend to keep unemployment low

MEANING AND SCOPE OF MONETARY POLICY

Meaning of monetary policy

Monetary policy is concerned with the changes in the supply of money and credit. It refers to the policy measures undertaken by the government or the central bank to influence the availability, cost and use of money and credit with the help of monetary techniques to achieve specific objectives. Monetary policy aims at influencing the economic activity in the economy mainly through two major variables, i.e., (a) money or credit supply, and (b) the rate of interest. The economists have defined monetary policy in different words. For example. R.P. Kent defines monetary policy as "the management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment." In the words of D.C. Rowan, "The monetary policy is defined as discretionary action undertaken by the authorities designed to influence (a) the supply of money, (b) cost of money or rate of interest and (c) the availability of money." Monetary policy is essentially a programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. The objectives of monetary policy are the same as the objective of macroeconomic policy. Viz. growth, employment, stability of price, and the balance of payment equilibrium. The macroeconomic goals are determined on the basis of the economic needs of the country. Once macro goals are determined, the basic policy question arises as to whether to increase or decrease the supply of money. The next step is to make the choice of instruments that can effectively increase money supply with the public.

SCOPE OF MONETARY POLICY

The scope of monetary policy spans the entire area of economic transactions involving money and the macroeconomic variables that monetary authorities can influence and alter by using the monetary policy instruments. The scope of monetary policy depends by and large, on two factors (i) The level of monetization of the economy, and (ii) The level of development of the financial market. In a fully monetized economy, the scope of monetary policy encompasses the entire economic activates. In such an economy, all economic transactions are carried out with money as a medium of exchange. In that case, monetary policy works by changing the supply of and demand for money and the general price level. It is therefore capable of affecting all economic activates-production, consumption savings and investment. The monetary policy can influence all major macro variables- GDP savings and investment, employment, the general price level, foreign trade and balance of payments. Another factor that matters in determining the scope and the effectiveness of the monetary policy are how developed and integrated is the capital-market. Some instruments of monetary control (bank ate and cash reserve ratio) work through the capital market. Where capital market is fairly developed monetary policy affects the level of economic activates through the changes in the capital market. It works factor and more effectively in an economy with a fully developed financial market incidentally a developed financial market is one which has the following features; (i) there exists a large number of financially storm commercial bank, financial institutions, credit organizational, and short-tem bill market, (ii) a major part of financial transactions are routed through the banks and the capital markets, (iii) the working of capital sub-markets is inter-linked and interdependent, and (iv) commodity sector is highly sensitive to the changes in the capital market. Monetary weapons like bank rate and cash resaves ration work through the commercial banks. Therefore, for the monetary pointy to have a widespread impact on the economy, other capital sub-markets must have a strong financial link with the commercial banks.

LIMITATIONS OF MONETARY POLICY IN DEVELOPING COUNTRIES

Through the monetary policy is useful in attaining many goals of economic policy, it is not free from certain limitations. Its scope is limited by certain peculiarities, in developing countries such as India. Some of the important limitations of the monetary policy are given below.

1. Large Non-monetized Sector

In many developing countries, there is an existence of non-monetized economy in large extent. People live in rural areas where many of the transactions are of the barter type and not monetary type. Similarly, due to non-monetized sector the progress of commercial banks is not up to the mark. This creates a major bottleneck in the implementation of the monetary policy.

2. Excess Non-Banking Financial Institutions (NBFI)

As the economy launch itself into a higher orbit of economic growth and development, the financial sector comes up with great speed. As a result many Non-Banking Financial Institutions (NBFIs) come up. These NBFIs also provide credit in the economy. However, the NBFIs do not come under the purview of a monetary policy and thus nullify the effect of a monetary policy.

3. Existence of Unorganized Financial Markets

The financial markets help in implementing the monetary policy. In many developing countries the financial markets especially the money markets are of an unorganized nature and in backward conditions. In many places people like money lenders, traders, and businessman actively take part in money lending. But unfortunately they do not come under the purview of a monetary policy and creates hurdle in the success of a monetary policy

4. High Liquidity
In rapidly growing economy the deposit base of many commercial banks is expanded. This creates excess liquidity in the system. Under this circumstances even if the monetary policy increases the CRR or SLR, it dose not deter commercial banks from credit creation. So the existence of excess liquidity due to high deposit base is a hindrance in the way of successful monetary policy.

5. Foreign Banks
In almost every underdeveloped country foreign owned commercial banks exist. They also render monetary policy less effective by selling foreign assets and drawing money from their head offices when the central bank of the country is following a tight monetary policy.

6. Money Not Appearing in an Economy

Large percentage of money never come in the mainstream economy. Rich people, traders, businessmen and other people prefer to spend rather than to deposit money in the bank. This shadow money is used for buying precious metals like gold, silver, ornaments, land and in speculation. This type of lavish spending give rise to inflationary trend in mainstream economy and the monetary policy fails to control it.

7. Time Lag Affects Success of Monetary Policy

The success of the monetary policy depends on timely implementation of it. However, in many cases unnecessary delay is found in implementation of the monetary policy. Or many times timely directives are not issued by the central bank, then the impact of the monetary policy is wiped out.

8. Small Bank Money

Monetary policy is also not successful in such countries because bank money comprises a small proportion of the total money supply in the country. As a result, the central bank is not in a position to control credit effectively.

9. Banking habits of people

The well-to-do people do not deposit money with banks but use it in buying jewellery, gold, real estate, in speculation, in conspicuous consumption, etc. such activities encourage inflationary pressures because they lie outside the control of the monetary authority.

10. Monetary & Fiscal Policy Lacks Coordination

In order to attain a maximum of the above objectives it is unnecessary that both the fiscal and monetary policies should go hand in hand. As both these policies are prepared and implemented by two different authorities, there is a possibility of non-coordination between these two policies. This can harm the interest of the overall economic policy.

These are major obstacles in implementation of monetary policy. If these factors are controlled or kept within limit, then the monetary policy can give expected results. Thus though the monetary policy suffers from these limitations, still it has an immense significance in influencing the process of economic growth and development.

INTRODUCTION
Monetery policy is concered with the measures taken to regulate the supply of money, the cost and availability of credit in economy. Further, it also deals with the distribution of credit between uses and users and also with both the lending and borrowing rates of interest of the banks in developed countries the monetary policy has been usefully used for overcoming depressions and inflation as an anticyclical policy. However, in developing countries it has to play a significant role in promoting economic growth as Prof. R. Prebisch writes, The time has come to formulate a monetary policy which meets the requirements of economic development, which fits into its frame work perfectly.

It is important to understand the distinction between objective or goals, targets and instruments of monetary policy whereas goals of monetary policy refer to its objectives which, may be price stability, full employment or economic growth, targets refer to the variables such as supply of money or bank credit, interest rates which are sought to be changed through the instruments of monetary policy so as to attain these objectives. The various instruments of monetary policy are changes in the supply of currency, variation in bank rates and other interest rates ,open market operatives, selective credit controls, and variation in reserve requirements.