impact of monetary policy on indian economy in the post-reform period

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1.5. SCHEME OF THE STUDY The study is organized under seven chapters. The first chapter provides an introduction to this study. It includes the statement <strong>of</strong> the research problem, significance <strong>of</strong> the study, objectives, data source & methodology, scope and the scheme <strong>of</strong> the study. Along that a brief report on <strong>monetary</strong> <strong>policy</strong> and global financial crisis is given in this chapter. It also includes a detailed literature review. The second chapter titled as ‗Monetary Theory and Policy‘ includes role <strong>of</strong> money in economic activity, theoretical understanding <strong>of</strong> <strong>monetary</strong> phenomena, definition <strong>of</strong> <strong>monetary</strong> <strong>policy</strong>, objectives <strong>of</strong> <strong>monetary</strong> <strong>policy</strong>, targets <strong>of</strong> <strong>monetary</strong> <strong>policy</strong>, indicators <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> and <strong>monetary</strong> <strong>policy</strong> and economic activity- an overview. The third chapter, viz; ‗Significance <strong>of</strong> Monetary Policy‘ discusses the role <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> in developed countries, importance <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> in developing economies, some <strong>monetary</strong> constraints, <strong>monetary</strong> <strong>policy</strong> and banking soundness and <strong>monetary</strong> <strong>policy</strong> implementation. till 2010. The fourth chapter makes a Review <strong>of</strong> Monetary Policy Measures Since 1991 The fifth chapter deals with Money Market Instruments and Interest Rates. The issues discussed in this chapter are: lending rate, deposit rate, liquidity adjustment facility, call money market, certificate <strong>of</strong> deposits, commercial papers, money market mutual funds, changes in the refinance facility, export credit and other money market developments. The sixth chapter is devoted for a discussion on ‗Monetary Policy in India‘. This chapter is divided in to two parts. Part A focuses on instruments <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> in India such as bank rate, cash reserve ratio, statutory liquidity ratio, open market operation, repo rate, reverse repo rate and selective credit control measures. Part B is on money prices and output. The major points discussed in this part are: reserve money, money multiplier, money supply in India, the price level and real output, inflation and economic growth, <strong>monetary</strong> <strong>policy</strong> and price stability and <strong>monetary</strong> <strong>policy</strong> and economic growth. 5
The last chapter provides the summary, findings, conclusion and recommendations <strong>of</strong> the study. 1.6. INDIA AND GLOBAL FINANCIAL CRISIS In India, since the financial system did not face a crisis, the damage to the transmission channel was minimal, even though the pre-global crisis time structural rigidities continued to limit the effectiveness <strong>of</strong> Reserve Bank‘s <strong>monetary</strong> <strong>policy</strong> actions. The recent switch over to the new ‗base rate‘ system is expected to help in improving and enhancing the visibility <strong>of</strong> the transmission <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> signals to credit markets. (1) Reserve Bank <strong>of</strong> India has listed high inflation. Consumer price inflation and WPI inflation have been in double digits since February 2010. This suggests that inflation has become much more generalized. The RBI‘s decision to ‗narrow the liquidity corridor‘ – the difference between the repo and reverse repo rates- is significant. The reverse repo has been hiked by a higher margin than the repo rate. Liquidity is tight at the moment. The reference point for banks would be the repo rate, the rate at which they can borrow. The <strong>monetary</strong> authorities have taken an optimistic view <strong>of</strong> the outlook for the economy and revised their earlier estimate <strong>of</strong> 8 percent growth in GDP to 8.5 percent. It has actually been hinted by the <strong>monetary</strong> authorities done through a reduction in commercial investments <strong>of</strong> banks, better use <strong>of</strong> the facility provided by the RBI and distinct improvement in the ways and means position <strong>of</strong> the Central Exchequer. The <strong>monetary</strong> authorities should desist from raising key interest rates and contracting money supply. Although Indian <strong>policy</strong>makers were in denial mode when the global crisis broke in the latter half <strong>of</strong> 2008, it became clear that there was a larger <strong>impact</strong> on the Indian economy than had been anticipated. The GDP growth rate fell by about two percentage points. This happened particularly because there was a decline in exports, which have come to account for nearly a quarter <strong>of</strong> GDP with India‘s growing integration with the world economy after its economic reforms initiated in 1991. Similarly, a number <strong>of</strong> 6
Page 1 and 2: IMPACT OF MONETARY POLICY ON INDIAN
Page 3 and 4: DECLARATION I declare that the thes
Page 5 and 6: Palayam, Centre for Development Stu
Page 7 and 8: 2.2.2. Contemporary Monetary Theory
Page 9 and 10: VI. MONETARY POLICY IN INDIA 268 6.
Page 11 and 12: Table No Title VI.18. Gross Domesti
Page 13 and 14: CHAPTER - I INTRODUCTION
Page 15 and 16: Money markets facilitate the conduc
Page 17: 2. To examine the effectiveness <st
Page 21 and 22: For sustaining the high growth path
Page 23 and 24: an instrument to generate additiona
Page 25 and 26: commercial sector. Otherwise, infla
Page 27 and 28: Ranjanendra Narayan Nag and Mallina
Page 29 and 30: the allowed objective of</s
Page 31 and 32: the foreign exchange market is at b
Page 33 and 34: Banking and stock market systems ar
Page 35 and 36: conduct of <strong
Page 37 and 38: Monetary policy is
Page 39 and 40: is a systematic response in the Res
Page 41 and 42: anking system. Monetary pol
Page 43 and 44: References 1. Reserve Bank
Page 45 and 46: 28. Manohar Rao, 2000. ‗Fiscal De
Page 47 and 48: 53. Shankar Acharya, 2002. ‗Macro
Page 49 and 50: CHAPTER -II MONETARY THEORY AND POL
Page 51 and 52: money. (4) Johnson (1969) distingui
Page 53 and 54: and liabilities increase by the sam
Page 55 and 56: money helps in equalizing the margi
Page 57 and 58: 5. As a means to capital formation
Page 59 and 60: 3. Interest rate ceiling was freed
Page 61 and 62: To conclude, the role of</s
Page 63 and 64: 2.1.7. Money Market in India The mo
Page 65 and 66: The 182-day Treasury bill was repla
Page 67 and 68: phased in such a manner that existi
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market, including issues comprising
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2.1.9. The Financial Sector Reforms
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also the characteristic of<
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established demand-and supply analy
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The value of money
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level will be strictly proportional
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deposits (D) of a
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The money supply (M) consists <stro
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employment, rate of</strong
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A. Total Wealth The total wealth is
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Income Friedman‘s quantity theory
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―An irregular simple empirical re
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Finally, even if there is the ‗li
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this model as world occur in a syst
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initial endowments of</stro
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economists believe that like transa
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Thus, the total demand for money ca
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Income; where with the increase in
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interest rate falls. People will, t
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employment is liable to fluctuate.
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atios among financial assets in the
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But, defined in a narrow sense, <st
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(2) Economic growth (3) Full employ
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monetary p
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Full Employment and Economic Growth
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price stability along with distribu
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This new set of fa
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Market yield on Equity Tobin sugges
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interest rate will rise again and s
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thriftiness, could not, it was argu
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Keynes emphasized that the liabilit
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close and regular relationship betw
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8. Friedman, M. 1970. The Counter R
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40. Friedman, Milton. 1956. The qua
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CHAPTER-III SIGNIFICANCE OF MONETAR
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3.1. ROLE OF MONETARY POLICY IN DEV
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most of investment
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many financial assets each differin
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composite or integrated system. Thi
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Despite the general support and ind
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is not just second best; it may eve
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3.3. SOME MONETARY CONSTRAINTS Ther
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countries. There is little reason t
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to monetary <stron
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ultimate goal variables on the othe
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CHAPTER- IV REVIEW OF MONETARY POLI
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currency reserves to $6.4 billion a
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public action. The balance
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4.4. MONETARY POLICY 1994-95 The ye
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of growth
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control money growth. The cash rese
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With regard to industrial productio
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atio of 1.7 per ce
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was restored with the sentiment imp
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eserves by over US $ 2.4 billion du
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government administrative departmen
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1999-2000 and an increase o
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has been significant deceleration i
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and SDR) reached a record level <st
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contribution of in
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cent in June, 2003. Lending rates h
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money as of that d
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from late 2003, posed considerable
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under pressure to reach 7.71 per ce
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Inflation, with its roots in supply
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The increasing trend in gross domes
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The average growth of</stro
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and 9.7 per cent in 2007-08 and 200
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facilitating monetary</stro
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world, for the better part
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went up from around 8 per cent to 1
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This is only a brief report <strong
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CHAPTER - V MONEY MARKET INSTRUMENT
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During 1961-85, the interest rates
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Table: V.1 Lending Rate during the
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ii) In the context of</stro
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iv) The Reserve Bank advised that t
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2004-05 2005-06 There was no releva
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1992-93 i) Deposit interest rates w
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domestic term deposit with a maturi
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(B) deposits. This would apply in r
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paying the depositors at the contra
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ii) Entities other than authorized
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iii) The interest rate ceiling on F
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Facility) served as a transitional
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were provided CLF and ACLF for the
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2. In the case of
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5.4. CALL MONEY MARKET The call mon
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1998-99 i) To develop an efficient
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Bank, an increased access over the
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ii) With effect from the fortnight
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5.5. CERTIFICATE OF DEPOSITS (CDS)
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ii) With a view to provide flexibil
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tend to raise amidst ample liquidit
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iii) In November 1996, the extent <
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as reflected in the close co-moveme
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iii) Effective from November 2, 199
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over the monthly average level <str
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1996-97 PSCFC scheme was terminated
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1999-2000 i) The general refinance
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1992-93 Some of th
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ii) As a measure to boost exports,
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2003-2004 i) The interest rate ceil
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1993-94 i) To provide flexibility t
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2000-01 i) In order to impart great
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viii) A fully functional RTGS syste
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led to improvement in liquidity man
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market and more or less stable inte
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CHAPTER -VI MONETARY POLICY IN INDI
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last resort‘, the central bank he
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November 1951 and increases in the
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the Bank Rate by 1 percentage point
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well as prime Lending Rate. Thus, a
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However, the method of</str
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the 14 th day of t
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1998 - 99 The CRR to be maintained,
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With a view to provide further flex
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2004-05 i) Cash reserve ratio (CRR)
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v) The CRR was proposed (October 6,
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Table VI.2(Contd.) Year Effective s
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percentage of thei
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September 1990. In view of<
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2004-07 2007-08 correspondent banks
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The Section 24 of
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3) To stabilize the securities mark
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Table: VI.4 Reforms in the Governme
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Table: VI.4. (Contd.) Reforms in th
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• Negotiated Dealing System (NDS)
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debt manager the RBI is merely sell
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anks and PDs, these policy<
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automatically invested and can rema
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1992-93 During the year, an active
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1999-2000 i) The Reserve Bank annou
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ii) It was decided that the facilit
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ii) The repo rate under the LAF was
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Year Effective since Table VI.5 Mov
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During the year 1992-93, an active
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Reserve Bank announced liquidity su
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2007-08 i) Withdrawal of</s
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Year Effective Date Table VI.6 (Con
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money against securities. Banks do
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According to Chandler, ―in many c
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(3) Though the banks ensure that lo
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term interest rate as their <strong
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the Central Government. The supply
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Chart VI.3. Annual Percentage Varia
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Annual Variation (%) Chart VI.4. An
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Table: VI.9 Money Multiplier during
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Over a period of t
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1977, the RBI has adopted four alte
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(4) M3 Time deposits or fixed depos
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Year Table VI.10 Net Bank Credit to
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Table: VI.11 Total Bank Credit to C
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Table: VI.12 Net Foreign Exchange A
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liabilities to the public had only
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Reserve money and Narrow Money exhi
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supply in India, in almost all the
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Output can be measured both in nomi
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een facing a loss of</stron
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decade of reform,
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India has still a balance between o
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Let us suppose that velocity is con
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Table VI.21 provides the annual rat
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India‘s inflation can also be mea
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taking both the absolute value and
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of other factors s
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6.2.7. MONETARY POLICY AND ECONOMIC
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Table: VI.27 Credit- Deposit Ratio
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with other advanced and emerging ma
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during 1996, 1998 and 2000-02 were
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Table: VI.31 Net Domestic Capital F
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was at the highest in 1991-92, with
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December 2002, employment growth in
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arising from the slowdown in growth
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to the system by the end of
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17. Reserve Bank of</strong
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CHAPTER-VII SUMMARY, FINDINGS, CONC
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6. It is objective and in discrimin
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Most central banks have, therefore,
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Monetarists believe that the econom
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targets is not enough. Such achieve
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3. In India, the opening up <strong
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18. Given the random nature <strong
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BIBLIOGRAPHY
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Chowdhry, Vikram. 2002. Monetary Po
Page 439 and 440:
Keynes, J.M. 1923. A Tract on Monet
Page 441 and 442:
Van Caspel, Venita. 1988. Money Dyn
Page 443 and 444:
EPW Research Foundation, 2000. ‗S
Page 445 and 446:
Kannan, R., Indranil Sen Gupta and
Page 447 and 448:
Prasanth, V.P. and Shetty, S.A. 200
Page 449 and 450:
Smets, F. 1995. ‗Central Bank Mac
Page 451 and 452:
Kannan, R. ‗The Dimensions <stron
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