Objectives of RBI Monetary Policy

The Monetary Policy of Reserve Bank of India has four major objectives. They are

  • Exchange rate stability
  • Price stability
  • Encouraging employment growth
  • Assisting for rapid economic growth.

Exchange rate stability:

For the purpose of exchange rate stability, RBI has not only resorted to exchange control but has helped the exporters to earn more foreign exchange. It has provided export finance through commercial banks and has helped both the government and the exporters to earn foreign exchange. By maintaining adequate foreign exchange reserve, it has prevented the domestic currency value from declining.

Price stability:

The price fluctuation in India is not only due to the interaction of supply and demand but also due to the activity of traders. Hoarding and black marketing are responsible for the price increase. Through selective credit control and by direct action, RBI has prevented the price rise to some extent. However, the presence of a large number of money lenders and indigenous bankers has prevented RBI from taking effective price control.

Full employment:

To promote more employment, both in rural and urban areas, RBI adopted the policy of Lead Bank Scheme. But when the system failed, in 1988, Service Area Approach was adopted. Accordingly, each bank branch was ear-market certain area in which the bank will be sole authority to extend credit. This has helped in generating employment in rural, semi-urban and urban areas. RBI has directed commercial banks to extend credit facilities to priority sector which is aimed at increasing employment generation.

Assisting for rapid economic growth:

Economic growth can be achieved only when the country experiences a substantial increase in production in agriculture, industry and service sectors. In our country, RBI has helped the government by mobilizing savings of the people for investment. The balance of payment position should also be under control for achieving economic growth. Though the five year plans have an object of 5.5% of economic growth only three percent could be realized which is due to an increase in population growth. Hence RBI is helpless. If the government co-operates by controlling the populating then the monetary policy of RBI will not only improve the economic growth by also help in the economic development of the country. That is increased production bringing an impact in the people in the form of higher standard of living.

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