BBA 1st Year Business Environment FEMA Long Question Answer

Evaluation of Monetary Policy

The major component of the increase in the money supply was Reserve Bank credit to the Central government. Reserve Bank was not able to control the rise in money supply because of legal and practical considerations interpreted by the Sukhamoy Chakravarty committee.

In containing the inflation rate the monetary policy operated by RBI couldn’t be effective. The growth of money supply in recent years was much higher than the growth in output. Thus RBI’s monetary policy failed in achieving its objectives.

One more argument to prove RBI’s helplessness is that the powers and weapons cover only the commercialised banks. RBI control may not have any effect at all if inflationary effect or pressure is brought by deficit in finance and shortage of goods.

The following description of monetary policy brings out the strengths and weaknesses of RBI’s monetary policy:

Weaknesses

Some weaknesses of RBJ’s monetary policy are as under:

(i) Higher proportion of non-banking credit.

(ii) No check on price rise.

(iii) High currency deposit ration rendering the RBI’s role less effective.

(iv) Defective statistical and monitoring system.

(v) Selective application of credit constraints.

(vi) Growing fiscal needs of the economy.

Strengths

Some strength of RBJ’s monetary policy are as under:

() Decision making and implementation is faster than fiscal policy.

(ii) More Reliance on selective credit control measures and less on quantitative controls making RBI’s pressure less on commercial banks.

(iii) Has been responsive on the needs of the economy.

Limitations of Monetary Policy

Various limitations of monetary policy can be described as:

1. The Time Lag : Time lag means, time taken in chalking out the policy action, its implementation and working time. It is having two parts:

(a) Inside lag or preparatory lag.

(b) Outside lag or response lag.

(a) Inside Lag It is the time lost in identifying the:

(i) Nature of the problem.

(ii) Sources of the problem.

(iii) Assuming the magnitude of the problem.

(iv) Choice of appropriate policy action.

(v) Implementation of policy actions.

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