1. Monetary policy is the process by which a central bank (Reserve Bank of India or RBI) manages money supply in the economy.
2. The objectives of monetary policy include ensuring inflation targeting and price stability, full employment and stable economic growth.
3. The money supply can be directly affected through reserve ratios or open market operations and can be indirectly affected by using key interest rates to influence the cost of credit.
5. A contractionary or tight monetary policy reduces liquidity and increases interest rates which has a negative impact on both production and consumption and therefore, economic growth.