Central Bank Policy And It’s

Macroeconomic Impact

• Introduction
Central Bank plays an important role in maintaining
economic stability by imposing it’s monetary policies.
The primary objectives of Central Bank includes,
controlling inflation, monitoring financial stability,
controlling money supply and influencing economic
growth of the country. In the recent years, central
banks have faced many difficulties or challenges such
as high inflation, global financial instability ( due to
covid lockdown period whole economy has to face
this problem) and the rise of digital financial
technology ( while having many pros of digital finance
still it’s main drawback is digital frauds) . In this
report, we will determine various policies that are
adopted by the central bank and its macroeconomic
implications.
• Objective of Central Bank Policies

The primary objectives of Central Bank Policies are:

1. Price stability- The Central Bank wants to maintain a

stable inflation rate to ensure stability in price by
controlling inflation or purchasing power remains
constant or unchanged because in the economy
each and every is considering real money rather
then nominal money, i.e. No one consider nominal
money even a labour because he is also considering
how much quantity of good he can buy using that
much amount of money he received in form of
wages.
2. Economic Growth- As economy growth is
unpredictable due to it’s dynamic nature, to
promote sustainability economical growth, Central

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 Bank need to adjust monetary policy tools optimally
to stabilize the economy either for doing stability
the Central Bank can increase or decrease the
interest rate in the economy to control money
supply of an economy.
3. Financial stability- To prevent banking crises Central
Bank often runs campaign ( As in India while calling
an alert message is provided by RBI to the consumer
to prevent banking crises) and it ensures smooth
functioning of financial institutions.
4. Employment Generation- It refers to generation of
employment to stable the economy and helps in
developing the overall nation. Central Bank uses
monetary policies to influence employment and
labour market conditions. In India As per the
Reserve Bank of India’s (RBI) latest KLEMS data,
employment in the country increased to 64.33 crore
in year 2023-24 compared to 47.15 crore in 2014-
15. Total increase in employment during 2014-15 to
2023-24 is about 17.19 crore. The creation of job
opportunities in India is also a challenging part for
the central bank as well as government that’s why
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 to reduce unemployment government and Central
bank take step by creating new schemes such as PM
Internship for college student and Pradhan Mantri
Rojgar Yojana to self employees the person to
control unemployment in the economy.
5. Foreign Exchange Rate Management- To stabilizing
currency fluctuations to promote international trade
and investments. In India Reserve Bank of India
manages the country’s foreign exchange reserve
and influence the value of rupee with respect of
other currencies. India operates under the managed
floating regime since 1993, as rupee value is
determined by the market forces but RBI also plays
an important role in controlling the value of rupee
with respect to foreign currency.

• Key Monetary Policy Tools

Central Bank often implement various tools such as

monetary policy tools to achieving their objectives. The
main monetary policy tools used by central banks are:

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 1. Interest Rate Adjustment- Interest Rate is need to
adjusted by every financial institutions by changing
rate on their loans and securities. Central Bank
either increase or decrease the interest rate in the
economy to stabilize money supply and control
inflation. In India reserve Bank of India recently
changes its repo rate to 6% which impact borrowing
cost of banks and potentially influence the interest
rate for the economy.
2. Open Market Operation (OPO) - Buying and selling
of government securities with the public to ensure
money supply in the economy. When central bank
buys the government security then it injected the
liquidity or money supply into the system by
providing funds to commercial bank and in case of
selling government security then it removes the
money from the system or decreasing the money
supply or liquidity from the economy.
3. Reserve Requirements- To regulating every bank
must need to maintain minimum amount as a
reserve to ensure liquidity or smooth performance
of financial institutions, it is also necessary because
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 it help the institutions to prevent them from the
debts. It is the tool used by the central bank to
increase or decrease the money supply in the
economy. By increasing the reserve rate for the
financial institutions, Central bank limits the money
supply of the economy and vis-à-vis in case of
decreasing the money supply in the economy.
4. Quantitative Easing(QE) – Another monetary policy
tool which allows central bank for purchasing assets
to inject liquidity in financial market during crises. It
becomes necessary in case the conventional
monetary policy such as lowering the internet rate,
is no longer effective for the liquidity in the
economy. Quantitative easing also involves ‘printing
of money', this tend to increase the money supply
but is risky as it lead to inflation in the economy
because ‘printing money' is not only solution for
running economy smoothly in fact it decrease the
purchasing power or real money of the country’s
currency.

• Contemporary Issues in Central Bank Policies

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 Contemporary issues in Central bank policies include:

1. Inflation Rate and Interest Rate- Inflation is one of

the most challenging thing which is faced by the
Central bank. To stabilize inflation Central Banks like
Reserve Bank of India adjust the interest rate to
control inflation from the economy. The Central
Bank uses its monetary policies to influence the
interest rate of the economy, we will further read
how inflation and interest rate are influenced by
Central bank by using Taylor’s rule how economy
attain stability.
2. The Taylor Rule and Roles in Monetary Policy- Two
economists, namely, Stanley Fischer and John
Taylor, took a stand opposite to Lucas and
Sargent. They said there are two reasons why
actual inflation will not fall even if policy changes
are credible and wage setters have taken policy
changes into account while forming their
expectations:
 Nominal rigidity: Wages and prices are often
set for some time and are typically not
readjusted when there is change in policy.
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  Staggering of wage contract: Not all wage
contracts are signed (hence expire) at the same
time. They are staggered overtime. Therefore,
nominal wages in all the wage contract cannot
be revised at the same time. This also implies
rigidity in nominal wage (and hence in price) at
the economy level.
Formula: i=r’+π+0.5(π−π’)+0.5(y−y’)
Where, i=Nominal interest rate in short/medium run.
r'= Real equilibrium interest rate, π= Current inflation rate
π’= Expected inflation rate, y= Actual GDP growth, y'=
Potential GDP growth
Taylor rule guides the central bank how much variation is
needed for the interest rate decision while balancing
inflation in the economy.
3. Central Bank Digital Currency (CBDC) – It aims to
digitalize old payment system such as cash to
integrate the financial system more effective and
efficient. It is similar to cryptocurrency, but its value
is fixed by the Central bank of the country and is
equivalent to the country’s fiat money. In India
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 CBDC is already testing by the Central Bank(Reserve
Bank of India) in the form of e₹, but the issues like
cybersecurity risk is only threat for the CBDC.
4. Financial Stability - From the prospective of
regulation and supervision the central bank has to
stabilize the financial system. As the financial sector
matures it becomes more complex, but to continue
the process of deregulation central bank need to
monitor financial stability of the overall system. To
safeguard the country’s economy from inflation and
corruption central bank often changes the policy or
sometimes it takes major step to overcome the
problem. In India central bank (Reserve Bank of
India) demonize the currency of ₹500 and ₹1000 by
removing its status from legal tender on 8
November, 2016 and recently another
demonetization is done on 20 May 2023, the
reserve bank of India announced that now they are
removing ₹2000 notes from the circulation.
5. Impact of Fintech and Digital Payments- As the
financial sector matures it becomes more complex
and with the introducing of digitalization the central
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 bank need to more responsible to prevent digital
frauds and cyberattack. For this RBI and other
financial institutions helps their consumer by
spreading awareness through ads to prevent them
from digital frauds and cyber threats. With the
impact of Fintech the people get more flexibility as
with the Fintech now person is able to access the
banking from the smart phones with the internet
access.
6. Global Monetary Policy Trends- The Central Bank of
different nation adopts their unique strategies
based on their economic conditions because
different economy have to face different situations .
In USA Central Bank (The U.S. Federal Reserve) use
monetary policy tool to increase the interest rate
aggressively. In Japan Central Bank (Bank of Japan)
maintains low-interest rate to encourage money
supply in the economy. This is how different
countries use the monetary policy to encourage
money supply in the economy accordingly the
nation requirement, also they used these policy to
strengthen their country’s currency.
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 • Challenges and Vision

The vision of Central Bank is surrounded by many

challenges are:

1. Balancing inflation control with economic growth- A

balanced economic policy is to manage inflation
sustainability while promoting growth and
investment. A stable inflation lead to economic
growth also prevents the country’s currency to
depreciate with respect to foreign currency. The
balance between inflation and growth is currently
unsettled, primarily due to higher- than expected in
September and October, driven by food prices.
Growth has decent jump in GDP growth protection for
fiscal year 25 revised to 6.6 to 7.2%.
2. Managing Risk from Digital finance- With the
innovation and technology Bank also improves it
infrastructure by Digital financial in which person
operate the Bank digitally with his smart phone having
internet access. The more it is convenient for the
consumer is also becomes risky in some cases cyber
security issue and attack makes it vulnerable. For this
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 Central Bank has to spread awareness to manage the
risk of cyber security from the economy. Recently
digital scams cases increases up to 1,00,000 exposed
that how fake caller uses digital arrest to extort
money. So, Central Bank and other financial
institutions of the nation joins hand to overcome the
challenge of risk.
3. Enhancing Transparency and Accountability in policy
decisions- More transparency and accountability are
required to maintain public support, safe guard
independence and enhance policy effectiveness.
Central banks have been engaging in a growing list of
activities. More of them have taken over supervision
and other financial stability functions, for example.
Transparency is an instrument to facilitate
accountability, allowing the public to better
understand how these actions serve their best interest
and are consistent with existing mandates, with the
ultimate goal of increasing effectiveness. The
increasing responsibilities and significant expansion of
balance sheets have led to a stronger demand for
central banks to better explain what they do, how, and
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 why. This is especially important as their
independence has come under scrutiny in many
countries. In central bank parlance, transparency and
accountability become the collateral guarantee of
independence.
4. Strengthening financial institutions against global
uncertainties- To reduce stress from only one sector it
is essential to manage the sector diversification to
improve the trend in the sector growth without any
pressure. To attaining the growth of sector Central
Bank needs to strengthen their financial institutions
so, that sector and demographic areas achieve growth
without any financial crisis. For example in the rural
area NABARD(National Bank for Agriculture and Rural
Development) which enables to develop the financial
institutions of rural area to properly function in rural
area without any problem. This help to ensure the
growth of the nation while facing global uncertainties
like tariff trade policy which impact the good in the
market by imposing tariff trade the price of good
specially imported good raises from 5 to 15% growth

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 rate of price, to stable this Central Bank need to do
something for dampening out the effect of tariff trade.

To attain stability and economic growth Central Bank

need to continue evolve its policy, to tackle the inflation
and other dynamic challenges to the Central bank.
Central bank policy impact the investment, global trade
and employment for the smooth functioning. Hence,
Central Bank many time collaborate with government
and financial institutions to tackle against the global
uncertainty.

• Conclusion

- Central Bank is a crucial player for the country which

plays an important role in policy creation and using
the monetary tool to stabilize the market condition
accordingly.
- It also plays a key role to prevent the public from the
cyber threats and other issues in the digital era
because the dependency on the digitalization shift a
burden on it.

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 - Central Bank has to face the challenges to dampening
the unemployment and global interference by
imposing traditional monetary tools.
- Central bank uses various other norms to effectively
manage the economy growth.

The report encourage me to study and research deeply

in central bank policy. While doing the research, it
shows me how country’s central bank is an important
player for the nation, how it tackle inflation and
unemployment and how it collaborate with government
and financial institutions to stable the economy’s
growth.

• References

To completing the report, I have to go through many

sites to research central bank policies. Some of the site
which help me in creation of this report are:

Class PPT( By macroeconomic teacher)

[Link]
[Link]
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 [Link]
[Link]
[Link]
[Link]
[Link]
[Link]
[Link]

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