24 Jun “Expansionary Monetary Policy in India: Growth Stimulus, Instruments, and Challenges
This article covers “Daily Current Affairs” and the Topic of Expansionary Monetary Policy in India: Growth Stimulus, Instruments, and Challenges
SYLLABUS MAPPING:
GS-3- Economics– Expansionary Monetary Policy in India: Growth Stimulus, Instruments, and Challenges
FOR PRELIMS
What are the key instruments of expansionary monetary policy?
FOR MAINS
What are the benefits and challenges of using expansionary monetary policy in India?
Why in the News?
What is Monetary Policy?
Monetary policy refers to the process by which the Reserve Bank of India (RBI) controls the money supply, interest rates, and availability of credit in the economy to achieve macroeconomic objectives like price stability, economic growth, and financial stability. It is a key tool of economic management, complementing fiscal policy, and plays a central role in managing inflation, controlling liquidity, and fostering sustainable development.
Types of Monetary Policy
| Type of Monetary Policy | When Applied | Objective | Key Tools |
|---|---|---|---|
| Expansionary Monetary Policy | During sluggish growth or recession | – Stimulate aggregate demand – Boost investment – Create jobs |
– Lowering repo rate – Reducing CRR – Open Market Purchases (buying government securities) |
| Contractionary Monetary Policy | During high inflation or overheating economy | – Reduce aggregate demand – Control inflation |
– Raising repo rate – Increasing CRR – Open Market Sales (selling government securities) |
Expansionary Monetary Policies in Practice
| Period/Event | Key Measures Taken | Instruments Used by RBI | Objective/Impact |
|---|---|---|---|
| Post-COVID-19 (2020–21) | – Repo rate cut to 4% – Loan moratoriums – Liquidity to NBFCs & banks |
– Repo rate cuts – LTRO & TLTRO – Special refinance windows |
Revive growth, provide liquidity, avoid credit crunch |
| Global Financial Crisis (2008–09) | – Repo rate slashed from 9% to 4.75% | – Monetary easing – OMOs – Banking sector liquidity support |
Stimulate credit flow, support demand, stabilize financial markets |
| Union Budget 2025–26 | – Repo rate cut to 5.5% – Aligned with fiscal push for infra & MSMEs |
– Repo rate cut – Targeted liquidity to priority sectors |
Boost investment, complement fiscal policy, support rural and industrial growth |
Key RBI Instruments – Expansionary Monetary Policy
1. Repo Rate Cuts: Lower borrowing costs boost loans, consumption, and investment.
2. LTRO / TLTRO: Provides cheap, long-term funds to banks for targeted sector lending (e.g., MSMEs).
3. Special Refinance Windows: Directed credit to NBFCs, HFCs, SIDBI, NABARD to maintain sectoral liquidity.
4. Open Market Operations (OMOs):RBI buys govt bonds → injects liquidity → eases interest rates.
5. Loan Moratoriums:Temporary pause on loan repayments during crises → borrower relief, avoids defaults.
Impact of Expansionary Monetary Policy
Positive Effects:
1. Boosts Investment and Consumption: Lower interest rates make borrowing cheaper for businesses and consumers, encouraging spending and investment.
2. Supports Employment Generation: Increased business activity due to higher demand can lead to the creation of more jobs.
3. Increases Aggregate Demand: Stimulates overall demand in key sectors such as housing, automobiles, and infrastructure.
4. Enhances Credit Flow: Improves liquidity in the banking system, encouraging banks to increase lending.
Challenges / Risks:
1. Inflationary Pressures: Excess liquidity may lead to demand-pull inflation if production does not rise in tandem with demand.
2. Asset Bubbles: Easy and cheap credit can cause unsustainable price rises in assets like real estate and stock markets.
3. Rupee Depreciation: Lower interest rates may prompt foreign investors to pull out capital, leading to a weaker domestic currency.
4. Weak Transmission: Banks may not effectively pass on the rate cuts to borrowers, limiting the impact of monetary easing.
Managing Inflation and Growth
| Aspect | Details |
|---|---|
| Policy Framework | Flexible Inflation Targeting (FIT) with CPI inflation target of 4% ± 2%. |
| Core Dilemma | Balancing growth stimulation vs. price stability. |
| Low Interest Rates | Encourage growth, investment, jobs → risk of rising inflation. |
| High Interest Rates | Control inflation → may suppress consumption, investment, and growth. |
| Policy Mix Solution | Requires coordination between RBI (monetary) and the Government (fiscal). |
| Pre-emptive Rate Action | RBI should adjust rates early if inflation expectations rise. |
| Need for Structural Reforms | Supply-side reforms to avoid stagflation (low growth + high inflation). |
Conclusion
Monetary policy is a powerful macroeconomic tool for managing inflation and promoting growth. While expansionary monetary policy can revive demand and stimulate economic activity, it must be applied prudently and in coordination with fiscal policy to avoid long-term imbalances. The ultimate goal is to achieve inclusive and sustainable economic growth with price and financial stability.
Prelims Questions
Q. Which of the following instruments can be used by the RBI for expansionary monetary policy?
1. Raising repo rate
2. Open Market Purchases
3. Increasing CRR
4. Targeted LTRO
Select the correct answer using the code below:
A. 1 and 3 only
B. 2 and 4 only
C. 1, 2 and 4
D. 2, 3 and 4
Answer: B
Mains Questions
Q. Discuss the role of expansionary monetary policy in stimulating economic growth in India. What are its limitations, and how can policy coordination between the RBI and the government enhance its effectiveness?
(250 words, 15 marks)
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