Rationale

The exit of monetary policy improves the economic performance. According to Damji (2012), India implements monetary policy in order to ensure the price stability in the country and to maintains sufficient flow of credit to the productive sectors of the economy. Other than that, the monetary policy can promote economic growth and balance of payment equilibrium. In addition, India uses monetary policy because of the reason to insure the unemployment in the economy is low and the income distribution among the employees is equal. The formulating and implementing of monetary policy is responsible by Reserve Bank India. By implementing monetary policy, the Reserve Bank of India can increase and decrease the supply of currency, the rise and fall of interest rate, carry out open market operations for purchase and sell of bonds, control credit and change the reserve requirements. Reserve bank of India implements both the expansionary monetary policy and contractionary policy throughout the last decade.

Among the objectives, the two main concern a country’s implements monetary policy is to promote a rapid economic growth and maintain price stability. But, that is a tradeoff between the 2 broad objectives which are price stability and economic growth. If a country’s implements monetary tightened, in consequence will caused the growth oppressed at the beginning.(Michaer 2010)However , the current framework of monetary policy can be indicate as augmented multiple indicators approach because the models feed into the growth and inflation projection. The monetary policy tools in India mainly involved the open market operation, statutory liquidity ratio (SLR) and cash reserve ratio (CRR).