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Limitations of the Monetary Policy of RBI Latest Updates

AJIT KUMAR WISDOM IAS, New Delhi.

In reality, the monetary policy has been assigned only a minor role in the process of economic development. The monetary policy is not given any predominant role in
the process of economic development. The Reserve Bank in expected to see that the process of economic development should not be hindered for want of availability
of adequate funds.

Con icting Objectives

An important limitation of monetary policy arises from its con icting objectives. To achieve the objective of economic development the monetary policy is to be
expansionary but contrary to it to achieve the objective of price stability a curb on in ation can be realised by contracting the money supply. The monetary policy
generally fails to achieve a proper coordination between these two objectives.

Huge Budgetary De cits

RBI makes every possible attempt to control in ation and to balance money supply in the market. However Central Government's huge budgetary de cits have made
monetary policy ine ective. Huge budgetary de cits have resulted in excessive monetary growth.

Coverage Of Only Commercial Banks

Instruments of monetary policy cover only commercial banks so in ationary pressures caused by banking nance can be controlled by RBI, but in India, in ation also
results from de cit nancing and scarcity of goods on which RBI may not have any control.

Problem Of Management Of Banks And Financial Institutions

The monetary policy can succeed to control in ation and to bring overall development only when the management of banks and Financial institutions are e cient and
dedicated. Many o cials of banks and nancial institutions are corrupt and ine cient which leads to nancial scams in this way overall economy is a ected.

Unorganised Money Market

Presence of unorganised sector of money market is one of the main obstacle in e ective working of the monetary policy. As RBI has no power over the unorganised
sector of money market, its monetary policy becomes less e ective.

Less Accountabilit
At present time, the goals of monetary policy in India, are not set out in speci c terms and there is insu cient freedom in the use of instruments. In such a setting,
accountability tends to be weak as there is lack of clarity in the responsibility of governments and RBI.

Black Money
Black money falls beyond the purview of banking control of RBI. It means large proposition of total money Supply in a country remains outside the purview of RBI's
monetary management.

Increase Volatility
The integration of domestic and foreign exchange markets could lead to increased volatility in the domestic market as the impact of exogenous factors could be
transmitted to domestic market. The widening of foreign exchange market and development of rupee - foreign exchange swap would reduce risks and volatility.

Lack Of Transparency
According to S. S. Tarapore, the monetary policy formulation, in its present form in India, cannot be continued inde nitely. For a more e ective policy, it would be
necessary to have greater transparency in the policy formulation and transmission process and the RBI would need to be clearly demarcated.

Unfavourable Banking Habits

An important limitation of the monetary policy is unfavourable banking habits of Indian masses. People in India prefer to make use of cash rather than cheque. This
means that a major portion of the cash generally continues to circulate in the economy without returning to the banks in the form of deposits. This reduces the credit
creation capacity of the banks.

Moreover in India there is predominance of currency in the money supply. This hampers the credit creating capacity of the banks. Due to high proportion of currency
in money supply, banks have to face the problem of large withdrawals of currency every time they create credit. Fortunately, the recent trend is increasing deposit
ratio in money supply. It is expected to make money policy more e ective.

Sunday, 07th Feb 2016, 09:55:14 PM

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