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

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CERTIFICATE Certified that the thesis, ‘IMPACT OF MONETARY POLICY ON INDIAN ECONOMY IN THE POST-REFORM PERIOD’ is a record <strong>of</strong> bonafide research work carried out by Mrs. Smitha. T.H., under my supervision. The thesis is worth submitting for the degree <strong>of</strong> doctor <strong>of</strong> philosophy. Cochin - 22 Dr. K. C. Sankaranarayanan, October 20, 2010 Former Pr<strong>of</strong>essor & Head <strong>of</strong> the Department, Department <strong>of</strong> Applied Economics & Former Dean, Faculty <strong>of</strong> Social Sciences, CUSAT.
DECLARATION I declare that the thesis, ‘IMPACT OF MONETARY POLICY ON INDIAN ECONOMY IN THE POST-REFORM PERIOD’ is the record <strong>of</strong> bonafide research work carried out by me under the supervision <strong>of</strong> Dr. K.C. Sankaranarayanan, former Pr<strong>of</strong>essor and Head <strong>of</strong> the Department, Department <strong>of</strong> Applied Economics, Cochin University <strong>of</strong> Science and Technology, Cochin-22. I further declare that this thesis has not previously formed the basis for the award <strong>of</strong> any degree, diploma, associateship, fellowship or other similar title <strong>of</strong> recognition. Cochin - 22 October 20, 2010 Smitha T.H.
Page 1: IMPACT OF MONETARY POLICY ON INDIAN
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 and 18: 2. To examine the effectiveness <st
Page 19 and 20: The last chapter provides the summa
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
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5. As a means to capital formation
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3. Interest rate ceiling was freed
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To conclude, the role of</s
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2.1.7. Money Market in India The mo
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The 182-day Treasury bill was repla
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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
Page 201 and 202:
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
Page 221 and 222:
iv) The Reserve Bank advised that t
Page 223 and 224:
2004-05 2005-06 There was no releva
Page 225 and 226:
1992-93 i) Deposit interest rates w
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domestic term deposit with a maturi
Page 229 and 230:
(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
Page 239 and 240:
were provided CLF and ACLF for the
Page 241 and 242:
2. In the case of
Page 243 and 244:
5.4. CALL MONEY MARKET The call mon
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1998-99 i) To develop an efficient
Page 247 and 248:
Bank, an increased access over the
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ii) With effect from the fortnight
Page 251 and 252:
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 <
Page 259 and 260:
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
Page 265 and 266:
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,
Page 273 and 274:
2003-2004 i) The interest rate ceil
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1993-94 i) To provide flexibility t
Page 277 and 278:
2000-01 i) In order to impart great
Page 279 and 280:
viii) A fully functional RTGS syste
Page 281 and 282:
led to improvement in liquidity man
Page 283 and 284:
market and more or less stable inte
Page 285 and 286:
CHAPTER -VI MONETARY POLICY IN INDI
Page 287 and 288:
last resort‘, the central bank he
Page 289 and 290:
November 1951 and increases in the
Page 291 and 292:
the Bank Rate by 1 percentage point
Page 293 and 294:
well as prime Lending Rate. Thus, a
Page 295 and 296:
However, the method of</str
Page 297 and 298:
the 14 th day of t
Page 299 and 300:
1998 - 99 The CRR to be maintained,
Page 301 and 302:
With a view to provide further flex
Page 303 and 304:
2004-05 i) Cash reserve ratio (CRR)
Page 305 and 306:
v) The CRR was proposed (October 6,
Page 307 and 308:
Table VI.2(Contd.) Year Effective s
Page 309 and 310:
percentage of thei
Page 311 and 312:
September 1990. In view of<
Page 313 and 314:
2004-07 2007-08 correspondent banks
Page 315 and 316:
The Section 24 of
Page 317 and 318:
3) To stabilize the securities mark
Page 319 and 320:
Table: VI.4 Reforms in the Governme
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Table: VI.4. (Contd.) Reforms in th
Page 323 and 324:
• Negotiated Dealing System (NDS)
Page 325 and 326:
debt manager the RBI is merely sell
Page 327 and 328:
anks and PDs, these policy<
Page 329 and 330:
automatically invested and can rema
Page 331 and 332:
1992-93 During the year, an active
Page 333 and 334:
1999-2000 i) The Reserve Bank annou
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ii) It was decided that the facilit
Page 337 and 338:
ii) The repo rate under the LAF was
Page 339 and 340:
Year Effective since Table VI.5 Mov
Page 341 and 342:
During the year 1992-93, an active
Page 343 and 344:
Reserve Bank announced liquidity su
Page 345 and 346:
2007-08 i) Withdrawal of</s
Page 347 and 348:
Year Effective Date Table VI.6 (Con
Page 349 and 350:
money against securities. Banks do
Page 351 and 352:
According to Chandler, ―in many c
Page 353 and 354:
(3) Though the banks ensure that lo
Page 355 and 356:
term interest rate as their <strong
Page 357 and 358:
the Central Government. The supply
Page 359 and 360:
Chart VI.3. Annual Percentage Varia
Page 361 and 362:
Annual Variation (%) Chart VI.4. An
Page 363 and 364:
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
Page 399 and 400:
of other factors s
Page 401 and 402:
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
Page 419 and 420:
17. Reserve Bank of</strong
Page 421 and 422:
CHAPTER-VII SUMMARY, FINDINGS, CONC
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6. It is objective and in discrimin
Page 425 and 426:
Most central banks have, therefore,
Page 427 and 428:
Monetarists believe that the econom
Page 429 and 430:
targets is not enough. Such achieve
Page 431 and 432:
3. In India, the opening up <strong
Page 433 and 434:
18. Given the random nature <strong
Page 435 and 436:
BIBLIOGRAPHY
Page 437 and 438:
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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