What is monetary policy?

Central banks use monetary policy to manage the supply of money in a country’s economy.

It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity.

Monetary Policy Tools In India

• Repo Rate
• Reverse Repo Rate
• Bank Rate
• Marginal Standing Facility (MSF) Rate
• Liquidity Adjustment Facility (LAF)
• Cash Reserve Ratio (CRR): Cash reserve ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Open Market Operations (OMOs)

Types of monetary policy

1. Expansionary Monetary Policy: Also known as loose monetary policy, expansionary policy increases the supply of money and credit to generate economic growth.
2. Contractionary Monetary Policy: Also known as tight monetary policy, contractionary policy decreases a nation’s money supply to curb rampant inflation and keep the economy in balance.