Monetary Implications of Modern Banking Operations
Central bank regulates the money supply through monetary policy in order to achieve specific objective. The monetary policy of a Central bank may have any of the following objects:
1. Neutral Money
Here, the money supply is so adjusted that it increases or decreases along with increase or decrease in production. By this, the price level in the country is maintained. Thus, money plays a neutral role.
2. Full Employment
To create more employment opportunities, industries are encouraged with cheap credit. Thus, the problem of unemployment is tackled. Loans are given at a lesser rate of interest.
3. Price Facility
With increase in money supply, prices are bound to increase. In order to control the price level, the Central bank will adopt different credit control measures.
4. Correcting adverse balance of payment
If more imports are resorted to with less exports, the country will experience adverse balance of payment. Along with this, there will be more foreign debt. This has to be corrected, for which imports will be restricted and exports will be encouraged. Foreign debt repayment will also be arranged.
5. Exchange Rate facility
The exchange rate in the country depicts the value of domestic currency in relation to foreign currency. The value of domestic currency falls with more demand for foreign currency. This is due to increasing imports. Less exports leading to less foreign exchange earnings. When there is exchange crisis, the Central bank will adopt such measures by which it can conserve more foreign exchange. One of the measures is exchange control.