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Unit 20: Indian Financial System: Money Market and Monetary Policy

• An evaluation of the various characteristics and defects of the Indian money market which we Notes
have described above will show clearly that the Indian money market is relatively undeveloped
and cannot be compared with such advanced money markets as the London and New York
money markets.
• While describing the characteristics of the Indian money market, we pointed out to the important
steps taken by RBI to correct some of those defects. For example, RBI has considerably reduced
the differences which existed between the different sections of the money market.
• Monetary policy, in general, refers to the action taken by the monetary authorities to control
and regulate the demand for and supply of money with a given purpose. Monetary policy is
one of the two most powerful tools of economic control and management of the economy.
• The scope of monetary policy spans the entire area of economic transactions involving money
and the macroeconomic variables that monetary authorities can influence and alter by using
the monetary policy instruments.
• The instruments of monetary policy refer to the economic variables that the central bank is
empowered to change at its discretion with a view to controlling and regulating the supply of
and demand for money and the availability of credit.
• We have discussed above the instruments, ‘the nuts and bolts’ of monetary policy. In this section,
we discuss how changes made in the monetary policy instruments affect the monetary and real
sectors and the economy as a whole.
• We have discussed above the meaning, scope, instruments and working mechanism of monetary
policy in a general framework and have also used examples of monetary measures adopted by
the RBI. In this section, we take a look at India’s monetary policy including its objectives,
instruments and targets.

20.4 Key-Words

1. Urban infrastructure : Infrastructure is the basic physical and organizational structures needed
for the operation of a society or enterprise, or the services.
2. Monopoly : The exclusive possession, control, or exercise of something: "men don't
have a monopoly on unrequited love".

20.5 Review Questions

1. What do you mean by the term Indian Capital Market? Discuss.
2. Discuss the features of the Indian Money.
3. Explain the reform of the Indian Money Market.
4. Write a short note on the Monetary Policy of India.
5. What are the objectives of Monetary Policy?
Answers: Self-Assessment

1. (i)(c) (ii)(a) (iii)(a) (iv)(b) (v)(b)
(vi)(d) (vii)(d)

20.6 Further Readings

1. The Indian Economy; S.K. Ray; Prentic, Hall of India Private Limited
New Delhi - 110001.
2. Indian Economy; Gaurav Datt and Aswani Mahajan; S. Chand and Company
LTD. Ram Nagar, New Delhi-110055.

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