Among several functions of central bank, monetary policy is regarded as one of the important function. Monetary policy is a policy that helps to maintain the price and interest rate at the desired level - through the management of supply of money in the economy. The level of money is managed by increasing or decreasing the supply of money by the monetary authority (i.e. central bank).
Definition
and views:
According to
Harry G. John:
“Monetary
policy is the policy employing the central bank’s control on the supply of
money as an instrument for achieving the objectives of general economic
policy.”
According to
G.K. Shaw:
“Monetary
policy is any conscious action undertaken by central monetary authority.”
According to
Edward Shapiro:
“Monetary
policy is the central bank’s control over the money supply as an instrument for
achieving the objectives of general economic policy.”
So, in order
to achieve the macro-economic goals, the central bank formulates the monetary
policy aligned with the fiscal policy of the government. In other words, the
monetary policy is designed by considering the existing situation and outlook
of the economy along with priorities, policies and programs of the government’s
budget.
Objectives of monetary policy:
- To make Price level stable
- To achieve full employment
- To make interest rate stable
- To make the Exchange rate stable
- To achieve rapid economic growth
- To Correct the adverse BOP
- To Induce savings
- To Invest the savings
- To Create and expand Financial Institution
- To reduce economic inequality
Generally, monetary policy is divided into following two types:
Instruments of Monetary Policy:
Instruments
of monetary policy represents a tool through which the central banks controls
the supply of money and regulates credit creation in the nation. The main
instruments of monetary policy are as follows:
A) Quantitative / General /indirect instruments
of Monetary Policy :
- OMO (Open Market Operation)
- Reserve Requirement/ Variation of cash reserves
- Bank Rate /Discount Rate
- Regulation of Margin requirement
- Regulation of consumer credit
- Moral suasion
- Credit rationing
- Publicity
- Direct action
- Interest Rate ceiling
- Differential re-discounting rates
- Differential CRR for different deposits
- Portfolio Regulations
The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.
Nepal Rastra Bank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy. In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.
The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed.
In the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank frames the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.
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