2. appropriately integrated with fiscal, foreign exchange and

2. Limited Role in Controlling Prices:

The monetary policy of Reserve bank has played only a limited role in controlling the inflationary pressure. It has not succeeded in achieving the objective of growth with stability.

The former Governor of Reserve Bank, I.G. Patel states,’ the role of monetary policy in combating inflation is strictly limited and that monetary policy can be effective only if it is a part of an overall framework of policy which includes not only fiscal and foreign exchange policy but also what is described as an income policy’. In India, however, the monetary policy of the Reserve Bank is not appropriately integrated with fiscal, foreign exchange and income policies.

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3. Unfavourable Banking Habits:

An important limitation of the monetary policy is unfavourable banking habits of Indian masses. People in India prefer to make use of cash rather than cheque. This means that a major portion of the cash generally continues to circulate in the economy without returning to the banks in the form of deposits. This reduces the credit creation capacity of the banks.

Moreover in India there is predominance of currency in the money supply. This hampers the credit creating capacity of the banks. Due to high proportion of currency in money supply, banks have to face the problem of large withdrawals of currency every time they create credit. Fortunately, the recent trend is increasing deposit ratio in money supply. It is expected to make money policy more effective.

4. Underdeveloped Money Market:

Another limitation of monetary policy in India is underdeveloped money market. The weak money market limits the coverage, as also the efficient working of the monetary policy.

The money market comprises of the parts, the organised money market and unorganised money market. The money policy works only in organised money market. It fails to achieve the desired results in unorganised money market.

5. Existence of Black Money:

The existence of black money in the economy limits the working of the monetary policy. The black money is not recorded since the borrowers and lenders keep their transactions secret. Consequently the supply and demand of money also not remain as desired by the monetary policy. In the words of V. Pandit, ‘Black money is rightly regarded as a threat to the official money credit policy mechanism to manage demand and price in several sectors of the economy.

6. Conflicting Objectives:

An important limitation of monetary policy arises from its conflicting objectives. To achieve the objective of economic development the monetary policy is to be expansionary but contrary to it to achieve the objective of price stability a curb on inflation can be realised by contracting the money supply. The monetary policy generally fails to achieve a proper coordination between these two objectives.

7. Influence of Non-Monetary Factors:

An important limitation of monetary policy is its ignorance of non-monetary factors. The monetary policy can never be the primary factor in controlling inflation originating in real factors, deficit financing and foreign exchange resources.

The Reserve Bank has no control over deficit financing. It cannot regulate the deficit financing, which affects money supply considerably.

8. Limitations of Monetary Instruments:

An important limitation of monetary policy is related to the inherent limitations in the various instruments of credit control. There are limitations regarding frequent and sharp changes in the bank rate, as these are supposed to conflict with the development objectives. Most bank rates are virtually fixed and mutually unrelated so that the scope for adjustment is very limited.

The margin requirements have tended to be so high for most of time due to prolonged inflation, that the scope for further increase in them is limited. The CRR and SLR have also been fixed very high locking most of the funds in low yielding assets. These limitations of monetary instruments hamper the smooth working of monetary policy.

9. Not Proper Implementation of the Monetary Policy:

Successful application of monetary policy is not merely a question of availability of instruments of credit control. It is also a question of judgement with regard to timing and the degree of restraint employed or relaxation allowed.

However, past experience shows that Reserve Bank’s credit restrictions have always fallen short of the required extent of restraint. The Bank has adopted a hesitant attitude in the field of monetary control.

In short, the monetary policy of the Reserve Bank suffers from many limitations. It requires improvements in many directions.