According to R.P. Kent, monetary policy is ‘the management of the expansion and contraction of volume of money in circulation for the explicit purpose of attaining specific objectives’.
The main objectives of Monetary policy are as follows:
(a) To stabilize money market: The main objective of monetary policy is to stabilize the money market and to reduce the fluctuations in the interest rates to the minimum. The neutral monetary policy should be introduced to achieve the equilibrium in the demand and supply of money.
(b) To stabilize the Exchange rate: The unstable exchange rate in international market is not favourable for the foreign trade of a country. The central tries to bring stability in foreign exchange rate through controlling credit creation activities of commercial banks.
(c) To stabilize Price level: Price stability is an important objective of monetary policy. The fluctuation in price level leads to ups and downs in business. The RBI, through its monetary policy controls the inflationary situations.
(d) To control business or trade cycles: The Business cycles are ups and downs in business. Existence of business cycle brings instability in economy. It is one of the objectives of monetary policy of RBI to control business cycles and bring stability.
(e) Full employment: The economic stability with full employment and high per capita income has been considered as an important objective of monetary policy. In order to achieve the objective of full employment, cheap monetary policy should be made applicable.
