The overall stance of monetary policy in the period ahead will broadly continue to emphasize on price stability and well-anchored inflation expectations. It will also ensure a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in the financial markets.

The broad objectives of the monetary policy in India relate to the maintenance of a reasonable degree of price stability and the need to bring about adequate expansion of credit to foster faster economic growth. But the relative emphasis on these objectives has naturally differed during various phases of India's development.

While the monetary policy regulates the supply of money and the cost and availability of credit in the economy in an attempt to maintain price stability, full employment and economic growth, the fiscal policy is a much broader government instrument to influence the level of national output and prices through deliberate changes in government revenue, borrowing and expenditure. An efficient and effective monetary policy through various transmission channels such as financial market prices (interest rates, exchange rates, yield, asset prices, etc.) and financial market aggregates (money supply, credit volumes, volume of government bonds, etc.) impacts its final targets in the form of output, employment and inflation. There has been a paradigm shift in the role of monetary policy from a predominantly financial market mechanism to an all-encompassing role, with a much-extended policy domain, including an accent on various segments of the real sector, the external sector and the impact of global market movements.

Four traditional channels of monetary policy transmission relate to interest rate, credit aggregates, asset prices and exchange rate. Interest rate channel provides the dominant transmission mechanism, influencing an expansionary or tight policy stance, aggregate demand through availability of loanable funds (credit channel) and movement in asset prices to generate wealth effects. In recent times, a fifth channel of expectations has come to be increasingly associated with the monetary policy. In other words, the expectation channel postulates that the beliefs of economic agents about future shocks to the economy and the central bank's response can also affect the economic and financial variables.

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