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

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8. Swings in capital flows and sudden stops can have a significant <strong>impact</strong> on exchange rates, domestic <strong>monetary</strong> and liquidity conditions and overall macroeconomic and financial stability. 9. For the economy as a whole, the most critical challenge is to revert to the high growth path, which would be possible only with a faster recovery. 10. Overall, Indian growth continues to be driven by domestic demand and domestic saving, with foreign capital supplementing within the prudent approach to sustainable current account deficit. Thus, return to 9 per cent growth would largely be determined by the country‘s structural fundamentals and the responsive macro <strong>policy</strong> environment. 11. Due to the global meltdown, the economy <strong>of</strong> India suffered as well. However, unlike other countries, India sustained the shock as an important part <strong>of</strong> its financial and banking sector is still under government regulation. Nevertheless, to cope with the present situation, the Indian government has taken a number <strong>of</strong> decisions like strengthening the banking and tertiary sectors, increasing the quantity <strong>of</strong> exports and lots more. 12. Half <strong>of</strong> the world‘s population is ‗unbanked‘. The result is that large portions <strong>of</strong> society cannot save or get credit, or are forced to access credit at inflated prices in informal markets- for example, through loan sharks-which can lead to inescapable debt spirals .(5) Very similar is the case in India. 1.7. REVIEW OF LITERATURE The contributions made by various scholars and experts in the field <strong>of</strong> Monetary Policy are really praiseworthy. Although various studies have been reviewed, only those works which are closely related to the present study are included here. Gupta and Srinivasan (1984) (6) attempt to assess the <strong>impact</strong> <strong>of</strong> changes in administered prices on sectoral and overall price movements using a simple inter- sectoral model. The results <strong>of</strong> the study clearly show that, the <strong>impact</strong> <strong>of</strong> administered price changes on relative and absolute prices cannot be assessed without taking into consideration their mutual interactions. The success <strong>of</strong> administered price revisions as 9
an instrument to generate additional resource mobilization in the public sector cannot be assessed in a partial equilibrium model. And the inflating potential <strong>of</strong> changes in administered prices is significantly high and the potential for generating additional saving is much less than the nominal effects. Paulson (1989) (7) , examines the <strong>impact</strong> <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> on Indian economy in the pre-reform period. The study reveals that the single important factor that influences the money supply in the economy is the reserve money. He points out a positive correlation between inflationary pressures and administered prices, and what is required, he suggests, to achieve price stability, is a cordial and symbiotic relationship between <strong>monetary</strong> <strong>policy</strong> and fiscal <strong>policy</strong>. Inflation is a <strong>monetary</strong> phenomenon (which is) fuelled by the excessive creation <strong>of</strong> money. In an article ‗Inflation, Monetary Policy, and Financial Sector Reform,‘ published in Southern Economist, Tarapore (1993) (8) mentions inflation as a tax on the weaker sections <strong>of</strong> society. ―The need for a <strong>monetary</strong> relaxation is <strong>of</strong>ten argued as being helpful to the weakest sections <strong>of</strong> society. Nothing could be farther from the truth. The curtailment <strong>of</strong> inflation is the best anti-poverty programme and therefore a strong anti-inflationary <strong>monetary</strong> <strong>policy</strong> is in consonance with societal concerns.‖ He also predicts that the imminent developments in the securities market in the foreseeable future call for development <strong>of</strong> entirely new skills in the Reserve Bank, the commercial banks and financial institutions. Our present <strong>policy</strong>-makers appear to be believers in shock therapy (Arun Ghosh, 1994) (9) . According to him, the objection to interest rates does not imply that all interest rates should suddenly and precipitately be brought down. Rather, two steps are necessary. First is a gradual lowering <strong>of</strong> the interest rate structure. Second, and more important, putting in place an institutional structure which would make adequate and timely credit available to small farmers, small industries, artisans etc… The ongoing reform <strong>of</strong> the financial sector is thus wholly misdirected, the reform has to be differently designed and implemented. The <strong>policy</strong> <strong>of</strong> imposing high interest rates on a stagnant economy is the direct result <strong>of</strong> the obsession <strong>of</strong> the present <strong>policy</strong>-makers with success in the financial markets rather than in the matter <strong>of</strong> growth <strong>of</strong> the real economy. 10
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 and 18: 2. To examine the effectiveness <st
Page 19 and 20: The last chapter provides the summa
Page 21: For sustaining the high growth path
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
Page 69 and 70: market, including issues comprising
Page 71 and 72: 2.1.9. The Financial Sector Reforms
Page 73 and 74:
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
Page 235 and 236:
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
Page 241 and 242:
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
Page 267 and 268:
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
Page 285 and 286:
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
Page 295 and 296:
However, the method of</str
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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
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percentage of thei
Page 311 and 312:
September 1990. In view of<
Page 313 and 314:
2004-07 2007-08 correspondent banks
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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
Page 321 and 322:
Table: VI.4. (Contd.) Reforms in th
Page 323 and 324:
• Negotiated Dealing System (NDS)
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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
Page 365 and 366:
Over a period of t
Page 367 and 368:
1977, the RBI has adopted four alte
Page 369 and 370:
(4) M3 Time deposits or fixed depos
Page 371 and 372:
Year Table VI.10 Net Bank Credit to
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Table: VI.11 Total Bank Credit to C
Page 375 and 376:
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
Page 383 and 384:
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
Page 391 and 392:
Let us suppose that velocity is con
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Table VI.21 provides the annual rat
Page 395 and 396:
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
Page 409 and 410:
Table: VI.31 Net Domestic Capital F
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was at the highest in 1991-92, with
Page 413 and 414:
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
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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
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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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