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| Banksloanonline » Policy » Monetary Policy |
Monetary Policy |
| Monetary policy is directly related to the credit and interest rate. It is a method through which a country controls the various aspects of money within its territory like its supply, its availability as well as the rate of interest. Monetary policy is a very significant tool to gauge the growth and development of the economy of a country and is therefore used to achieve its economic objectives and goals. For monitoring the smooth operations of the financial system, several nations of the world have set up centralized banks called Central banks that look after the execution and overall function of the monetary policy. |
Monetary policy is primarily influenced by the below mentioned factors that play a very crucial part in its being and execution:
- Short term / long term interest rates
- Exchange rates
- Credit quality
- Bonds and equities
- Government v/s private sector costs + savings
- International capital flow of money
- Financial derivatives
The history of the monetary policy can be traced back to the times when it was used as a means to maintain Gold standards. Although this practice gave way to the modern policies that takes care of money and its flow within an economy, it is nevertheless still argued that the gold standard be brought back. However, the advantages and disadvantages that are associated with the monetary policy compel the economists to form a 2nd group who would still like to go ahead with the current policies and patterns and see no harm in retaining the current features of the same. Monetary policy and Fiscal policy have remained very closely intertwined until about 30 - 40 years back. However, now both the policies are formed separately with each policy taking care of distinct objectives and purposes.
Indian monetary policy greatly affects the inflation rates, export and imports of the country as well as money supply in the economy.
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