Monetary Policy Central Bank
The policy by which the government regulates the supply, availability and value of the money in the economy is popularly termed as monetary policy. On the other hand the Central Bank which is popularly known in India as the Reserve bank is the monetary authority that coordinates with the government for implementing such regulation.
Many economists refer the monetary policy central bank conducted as expansionary as it supplies the total money in the market while some say that it is contraction process since it controls the flow of money in our economy. However we can always say that monetary policy in combination with fiscal policy helps the government to borrow, regulate tax and spending on the public welfare.
Following are the work done by the implementing the monetary policy by the Central Bank:
The Central bank mainly issue and maintain a firm flowing currency with the help of this policy. Apart from this it controls inflation, hold the deposit and the lending of the other banks.
And even these days the Central Bank is trying to achieve the total stability in economy by circulating different quantity of money in the market in the form of credit that comprises the national debt of the country.
There are three tools for implementing the monetary policy in India:-
1. Open market operations
2. The 'Discount Window'
3. Reserve requirements
In the Open market operations the Central Bank buys and sells the Government bonds in the open market by lowering the interest rates thus ensuring to control the supply the money on day to day basis.
The Discount Window is a tool where the depository institutions and commercial banks borrow reserves from the reserve bank at a huge discount. The interest rate is normally set under the short term market rate which helps it to differentiate credit conditions thus working on the money supply.
Reserve requirements are the procedure in which the financial institutions have to keep certain deposits to the Central Bank as a Banking Regulation and as per this The Central has the full authority to change the percentage of interest at any time which is directly related to the supply of money in the economy.