RBI's Monetary policy is one of the most powerful tools used by a nation’s central bank to influence the economy. It helps control inflation, manage liquidity, and support economic growth. Understanding how monetary policy works and how it affects financial markets is essential for investors and traders.
Monetary Policy Meaning
Monetary policy forms part of a central bank’s macroeconomic strategy. It involves controlling the supply of credit and money in the economy to achieve specific goals such as price stability, employment generation, and sustainable growth. In India, the Reserve Bank of India (RBI) implements monetary policy to maintain economic balance and ensure financial stability.
There are two main types of monetary policy:
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Expansionary Policy: The central bank decreases interest rates and increases the money supply to boost borrowing and spending.
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Contractionary Policy: The central bank raises interest rates and restricts the money supply to control inflation and reduce excessive demand.
Difference Between Monetary and Fiscal Policy
While both aim to manage the economy, they operate differently. Monetary policy is managed by the central bank (RBI), focusing on money supply and interest rates. Fiscal policy, on the other hand, is executed by the government, focusing on taxation, public spending, and subsidies. Monetary policy generally affects the economy in the short to medium term, while fiscal policy has long-term developmental impacts.
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