Rapid Economic Policy Analysis

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A country’s economy is controlled by two types of economic measures – fiscal and monetary. While the fiscal policy is framed and implemented by the government with regulation of its spending and collection of revenue, the monetary policy is controlled by the central bank of the country (in India, it is Reserve Bank of India). These policies are designed and implemented for the expansion or contraction of the economy. Policy measures aimed to increase the gross domestic product (GDP) and the economic growth are called expansionary. The measures taken to check an inflationary economic trends are called contractionary measures. Conceptually, when demand is low in the economy, the government can step in and increase its spending to stimulate…show more content…
Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.

2. Regulation, Supervision and Development of Financial Stability: Financial stability means the ability of the economy to absorb shocks and maintain confidence in financial system. Threats to financial stability can come from internal and external shocks. Such shocks can destabilize the country’s financial system. Thus, greater importance is being given to RBI’s role in maintaining confidence in financial system through proper regulation and controls, without sacrificing the objective of growth. Therefore, RBI is focusing on regulation, supervision and development of financial
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In India, the three major objectives of economic policy are growth, social justice (equitable distribution of income and wealth) and price stability. Of these, price stability is perhaps the one that can be pursued most effectively by the monetary authorities of the country. The monetary policy of an economy operates through three important instruments, viz., and the regulation of money supply, control over aggregate credit and the interest rate policy. In pre-reform period, given the largely underdeveloped state of financial system, regulated nature of financial markets and plan priorities, the RBI often resorted to the direct instruments of monetary policy like CRR, SLR and interest rate for allocating credit and regulating money supply in the economy. Gradual liberalization and globalization of the economy, strengthening and development of the financial system, restrictions on the automatic monetization of fiscal deficit and various other changes in the economy had made it possible for the RBI to operate with the indirect instruments of monetary policy such as bank rate, repo rate and OMOs (open market operations). Accordingly, there has been a distinct shift in the monetary policy framework and operating procedures from direct instruments of monetary control to market based indirect instruments in the recent years. The thrust has been to provide the market mechanism a greater role in the economy, to provide the banks more operational flexibility and to bring
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