An effective and proper monetary policy will not only provide adequate financial resources for economic development but also help the underdeveloped countries to set up and accelerate the rate of output, employment and income. It may also help these countries in containing inflationary pressures and achieving balance of payments equilibrium. The following are the main objectives of monetary policy in a developing economy:

Capital formation which is a prerequisite to economic growth depends upon saving. Monetary policy in a developing country helps in promoting savings, their mobilization, and their investment in productive activates. Monetary authority has to provide adequate banking facilities to the people so that they may deposit their small savings with the banking institutions, which may later on the utilized for investment purpose. In order to induce savings, the monetary authority has to offer various incentives to the savers in the form of high rate of interest, safety of deposits, etc.

According to Prof. Meier and Prof. Baldwin, “the problem of inadequate savings cannot be solved merely by creating new institutions, but the problem can be solved only by having profitable investment of savings.” The objective of economic growth cannot be achieved unless and until the savings are utilized in productive investment activities. The rate of investment is very low in developing countries on account of the absence of profitable productive activates, lack of entrepreneurial ability and low marginal efficiency  of capital. The central bank in such a situation can resort to cheap money policy to promote investments.

The structure of the rate of interest is generally not conducive to economic growth in developing countries. The rates of interest do not only differ according to different time- schedules but these also differ in different regions and business activates. High rate of interest, as they are generally witnessed in underdeveloped countries, discourage both public and private investment. The monetary authority, therefore, is required to formulate such a policy as regards the rate of interest which may induce the investors to go in for more loans and advances from the commercial banks and other financial institutions.

Monetary policy in a developing country should be directed towards achieving equality between demand for money and supply of money. In the initial stages of economic development ether is need to expand credit facilities, but once a certain level of growth is achieve credit restrictions of various kinds must be imposed by the central bank. In impose credit restrictions to control the supply of money.

Most of the developing countries have to import capital goods, machinery, equipment, technical know-how, etc., in the initial stage of their development. Consequently, their imports exceed the exports and balance of payments becomes unfavorable. Monetary policy should be directed towards maintaining stability in exchange rates and removing disequilibrium in the balance of payments.

Internal price stability is an important objective of monetary policy in developing countries. Violent fluctuations in the internal price level not only disrupt the smooth working of an economy but these also lead to insecurity and social injustice. While inflation crates enormous hardships for the wage-earners and consumer, deflation proves disastrous for both entrepreneurs and wage-earners. Increasing cost of labour and material also increase the cost of various projects, which adversely affects the rate of economic growth.

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