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Instruments of Monetary Policy and The Reserve Bank of India

Last updated date: 23rd May 2024
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Instruments of Monetary Policy

Monetary policy is a policy that is an action taken by the Central Bank regarding the activities related in monetary terms. They might be cash, credit, ledgers, mortgage, bonds, debentures, loans, check money markets, etc. The policy is designed by the Central Bank of that particular Nation to regulate the economic imbalances either may be inflation or deflation.

We will know about the monetary policy in this section in detail. 

What are the basic aims of monetary policy? 

The basic aim of the monetary policy are as follows:

  • To regulate inflation.

  • To decrease the level of unemployment.

  • To increase long term interest rates.

Tools of Monetary Policy in India

The Central bank designed the tools of monetary policy. Several central banks will create a common three tools for monetary policy irrespective of the nation. So the basic tools of monetary policy in India are:

Discount Rates

The discount rate is one of the basic terms of monetary policy. The monetary policy aims to stabilize and regulate the nation's economy, which can be fulfilled by a change in discount rates. If the discount rate is reduced, the investors can get less money and take loans from other Banks. It helps any increase in the liquidity of cash. It creates growth in the economy. If the discount rate is high, all the procedures are vice versa.

Requirement of Reserves

Every nation has to maintain some reserves of all kinds of resources, especially financial resources. To maintain these reserves, the government should understand the basic requirements of that particular country. 10 to these results are certain portions of the available funds or investments to the reserve bank. As a result, the Bank of India holds a specific part of the existing money in the form of cash. It is used to lend its customers and also for businesses. It keeps reserves from the deposits and provides them in the form of loans. It also earns some money which may help to maintain the necessities of the Central Bank and the subsidiary Banks.

Growth in Open Market Operations

We all know that a market is a place where we can buy and sell goods. Here the open market refers to the buying and selling of securities from various countries. This is another tool of monetary policy that is designed for trading activity, and it is directed and regulated by the various countries of central banks of that particular Nation with which we make a deal.

What are the Instruments of Monetary Policy?

Instruments of monetary policy in India are categorized into two types. One is qualitative, and the other one is quantitative instruments. These are designed based on the toons of monetary policy which is prescribed by The Reserve Bank of India. Instruments of monetary and credit control will act as an excellent weapon for the country to regulate the demand and supply of resources to that particular nation. So, they have designed these instruments.

Qualitative Instruments

  • Credit Rationing

  • Licensing

  • Requirement of margins

  • Dynamic interest rates

  • The consumer rate is to be regulated

Quantitative Instruments

  • Open market operations

  • Bank rates

  • Repo rates and reverse repo rates

  • Liquidity

  • Change in requirement

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Who Controls the Monetary Policy in India?

The Reserve Bank of India controls the monetary policy in India. Because it is the central bank of our nation. The instruments of the monetary policy of the RBI, which we have discussed above, can help the RBI to control the money supply and the flow of money to various activities of the nation.

RBI is the central body of India which was established in takes care of all the financial transactions and regulates the currency of the country. It provides a set of tools and instruments to maintain monetary policy transparently.

How does the RBI Control the Money Supply in the Economy?

The main objective of the hardware is to control the money supply in the economy to maintain its stability because the Nations should stand properly only with efficient resources. The RBI uses different tools and instruments like cash reserve ratio, statutory liquidity ratio, changes in repo rate and reverse report, moral suasion, etc. several instruments are in the tools used to maintain the monetary policy.

Objectives of Monetary Policy

  • Bank Credit Expansion

One of the most important functions Of RBI is to control the bank credit expansion and supply of money. And special attention is paid to seasonal credit requirements without affecting the stability.

  • Stability of Price

Bringing in Price stability also promotes the development of the country’s economy. However, the central focus must facilitate an environment favorable to architecture. This helps the development projects to run smoothly without affecting the price stability. 

  • Fixed Investment

The main aim here is to increase the productivity of investment without affecting non-essential fixed investment.

  • Distribution of Credit

Monetary authorities hold rights over decisions for assigning credits to sectors and borrowers. This policy is decided over a specified percentage in order to allocate to desired people

  • Promote Efficiency

The central bank pays attention to efficiency to incorporate structural changes. These structural changes include interest rates, operation constraints, and new money market instruments. 

  • Reduce Rigidity

Reducing rigidity helps to provide considerable autonomy and a sense of flexibility at work. This helps to bring in a competitive environment and diversification among work cultures. Moreover, control over the financial system is maintained and prudence in systems is observed. 

  • Inventories

Overloading stocks and products getting expired often results in the sickness of organizational units. And hence to avoid these habits, the monetary authority restricts forming inventories by giving a major highlight to prevent idle money in the market. 

Monetary Policy Operations

Monetary policy is managed by the Central Bank Of the country. In the case of India, it is managed by the Reserve Bank of India. The operations that come under this policy are as follows:

  • Money Supply

  • Stability of price

  • Interest rate

  • Economic Growth

  • Financial stability

  • Balance of payment

  • Stable exchange rate

Key Indicators of Monetary Policy

There are various factors associated with monetary policy. Though it is managed by the Reserve Bank of India it overall affects the country and its economy. According to 2020 report following are the key  indicator of the monetary policy:


Current Rate









Bank rate


Repo rate


Reverse repo rate


GDP growth rate


Monetary Policy Committee

For any organizational work, a good committee is an important requirement. And when it comes to the committee for monetary policy the following people are selected at some specific designations

  1. Governor of Reserve Bank of India as chairperson

  2. The deputy governor of the Reserve Bank of India as in charge of monetary policy

  3. One officer from the Reserve Bank of India

  4. Actions of renowned person experts in their own field such as professor research Senior Advisors or committee members. 

The primary job of this committee is to observe and manage the daily liquidity work so that the target decides which weighted average Call money rate or WACR is observed. 

The Monetary Policy Framework

The reserve bank of India holds full rights to manage and control the monetary policy framework for the county. 

The framework aims to provide the following:

  • Deciding repo policy rate based on the assessment of situations

  • Modulating liquidity conditions to anchor money market 

And once, this repo rate is announced, the RBI authority manages day to day appropriate actions with an aim to operate the target. 

This framework is tuned and revised accordingly by looking at the market prospectus.



Hunts it is clear that the monetary policy is a proforma or a set of rules imposed by The Reserve bank of India to maintain stability in the growth of the economy. The RBI needs to monitor all the financial transactions in all its forms and to keep up the sufficiency of currency without degrading its value.

FAQs on Instruments of Monetary Policy and The Reserve Bank of India

1. Distinguish between monetary policy and fiscal policy?

Monetary policy is concerned with the Supply of money,  whereas fiscal policy is the monetary policy of the government. Monetary policy affects the cost of borrowing for mortgages and fiscal policy affects the Budget deficit. Monetary policy is influenced by interest rates whereas fiscal policy is influenced by Tax rates and government spending. The fiscal policy is managed by the government and monetary policy is managed by the Central Bank Of the country. Political influence on monetary policy is comparatively low but politics highly affect fiscal policy. And hence, Monetary policy is highly independent as compared to fiscal policy. The country's economy is directly impacted by monetary policy whereas fiscal policy does not directly impact the economy.

2. How many times does the RBI announce a monetary policy for a year?

The RBI has different departments. The major sections which will decide monetary policy are-one are the monetary policy committee, and the other is the financial Market committee. These two committees will have to meet with the monetary policy department and then discuss the day-to-day variations. As the monetary policy committee consists of four members, each one has an opportunity to vote. Also l the governor will have a second casting vote.By considering all these votes, the monetary policy may decide a maximum of four times per year. This might be changed according to the sudden situations and reformations of various governments. The governor plays a major role in every transaction and decision of the RBI because he is the head of the Reserve Bank of India.

3. How many types of monetary policy are there?

There are two different types of monetary policy:

Contractionary Monetary Policy: It is used to decrease the circulation of money by selling government bonds, securities, change in interest rates, etc.

Expansionary Monetary Policy: It is in contrast to the above policy. It is used to increase the money supply by decreasing all financial activities like reducing interest rates, lowering trading activities, etc.

4. When did India propose monetary policy?

The first monetary policy was proposed by the Reserve Bank of India in 1934. This policy is legally noted under the Reserve Bank of India Act 1934. With a view to controlling the money supply rate, monetary supply was started.  since the work was going to take place on a global scale, hence it was necessary that work must be under some trustworthy government corporation. So, the Reserve Bank of India took it under their control and they have managed successfully until now 

5. How does RBI control the money supply?

The Reserve Bank of India or RBI formulates the monetary policy. This policy is aimed towards the supply of money. All the functions related to the money supply, Availability and cost credit are taken care of by this policy. Some objectives have been defined by the RBI for the working of monetary policy. ThIS policy is also equipped with a target rate along with Some schemes to be developed. There are various key indicators that make sure the target is on track.