Suitable Monetary Policy for Developing Countries like India

Suggest a suitable monetary policy for developing countries like India.

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Suitable Monetary Policy for Developing Countries like India

Monetary policy for developing countries like India should be in relevant to economic system of the nation and it should ensure equal distribution of articles and services at low cost. Following are the essentials monetary policy for a developing country :

1. Capable in Achieving Highest Level of Employment- Monetary policy of the country should make effort to provide highest level c employment (full employment) in the country. Central bank of the country should reduce his rate and made available credit cheap rate. It will reduce rate of interest and cost of production in industrial units. Consequently employment opportunities will also increase. New industrial units shall b motivated due to cheap capital. Many persons will acquire employment in these new industries.

When persons will receive more employment it will increase demand a large. Monetary policy will be helpful in generating employment opportunities and establishing balance between savings and investments.

2. Provisions for Maintaining Stability in Prices – Provisions for maintaining stability in prices should be made in monetary policy. These provisions should be capable in maintaining price stability. If monetary policy is capable in maintaining stability in prices, it will minimize cyclical fluctuations of money. Economic stability shall be established and inequalities in income and assets distribution will be minimized. Stability in prices will increase economic welfare with social justice.

Following problems are arised in maintaining stability in prices in the case of developing economy:

Problem of prices to be kept stable.
Stability of retail or wholesale price.

While determining the monetary policy efforts should be made so that prices of consumer goods and rates of wages can be stablized. However, it is a special thing of monetary policy that some price increase is essential for economic development. The concept of price stability is not suitable for dynamic economy.

3. Stability in Exchange- Monetary policy of the developing countries should be capable in bringing stability in exchange rate. Following advantages can be acquired through stability in exchange rate :

Establishment of co-operation among countries.
Establishment of good international financial and commercial relationship.
Positive impact on international capital and credit and restriction on the trend of speculation in foreign currency.
Maintaining balance of payment at suitable level.
Keeping stability in international prices.

Since foreign trade is very important in the developing countries like India. So, it is essential that such countries should change their monetary policy in relation to stability in exchange rates.

4. Development-Oriented – Such arrangements should be made in monetary policy which can encourage development of economy. It is also essential that products manufactured in the country should be increased. Economics development is related with inflation. However, inflation can be helpful in economic development only when it is applied continuously.

Monetary policy should contain such provisions which control the credit in the country.

If any economic drawback is available in the tax system, monetary policy should be capable in improving tax system.

More poverty, low per capita income, slow economic development etc. are seemed in developing economy. So for these countries it is essential that they should give preference to enlarge employment facility along with economic development. These countries should arrange capital by adopting liberal monetary policy. Liberal monetary policy will generate opportunities for the development of natural resources and product as well as employment. This process will improve the money and credit. If some inflation or price increase takes place due to monetary policy, it is not a bad indication. Now it is essential that developing countries should adopt liberal monetary policy to ORing pace in employment and economic development.

5. Controlled Expansion of Bank Credit: One of the important function of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without effecting the output.

6. Promotion of Fixed Investment: The aim here is to increase the productivity of investment by restraining non-essential fixed investment.

7. Restriction of Inventories and Stocks: Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness o the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in organization.

8. Promoting Efficiency : It tries to increase the efficiency in the financial system and tries to incorporate structural changes such a deregulating interest rates, easing operational constraints in the credit delivery system, introducing new money market instruments etc.

9. Reducing Rigidity: RBI tries to bring about flexibilities in operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintain its control over financial system wherever necessary to maintain the discipline and prudence in operations of the financial system.