A division bench of Chief Justice Hemant Gupta and Justice Vijay Kumar Shukla asked the government to complete the process within five years after framing the policy.
The policy should be uploaded on the government's website within four months of Thursday's order, the court said.
The court observed that due to a shortage of regular teachers, 70,000 'guest teachers' had to be hired this year.
"The engagement of a large number of guest teachers cannot be a rule and the state government will be well advised to fill the posts of teachers in the schools in a phased manner in the years to come," the judges said.
The directions came on petitions filed by guest teachers hired for the academic year 2017-18.
These teachers had moved the court against certain aspects of the hiring of guest teachers for the academic year 2018-19.
(With inputs from agencies.)