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

external, real and financial sector equilibrium, is then used to prescribe feasible
stabilization <strong>policy</strong> options for the Indian Economy over the current fiscal year. The
twin issues <strong>of</strong> interest rate and exchange rate determination, is becoming increasingly
important. Only when its behavior is well understood, it will be possible to predict their
effects on key macro-economic variables such as GDP, inflation, savings, investment
and, above all, economic growth.
Rajwade (1999) (23) noted in his commentary on ‗Perspectives on Monetary
Policy‘ that: ―The explosive growth <strong>of</strong> information technology could erode the power
<strong>of</strong> central banks- noted in their monopoly over the creation <strong>of</strong> money‖.
Money at the basic level is anything generally accepted as a medium <strong>of</strong>
exchange. The difficulties in quantifying money supply have been there, for sometime.
Historically, barter was found inefficient because <strong>of</strong> different exchange rates. Now,
these constraints can be removed, as E-cash replaces the currency. Thus the
conventional ‘money world‘ ceases to be the only medium <strong>of</strong> exchange, eroding the
power <strong>of</strong> central banks.
As part <strong>of</strong> financial sector reforms, a number <strong>of</strong> steps have been taken to
enhance the effectiveness <strong>of</strong> <strong>monetary</strong> <strong>policy</strong> and these include improvement in the
payment and settlement systems, development <strong>of</strong> secondary market in government
securities with a diversification <strong>of</strong> investor base, reduction in non-performing assets
and reduction in the overall transactions costs. In particular, the recent initiatives <strong>of</strong>
RBI to develop money market and debt markets should contribute to improving the
transmission mechanisms <strong>of</strong> <strong>monetary</strong> <strong>policy</strong>. All the reforms in the <strong>monetary</strong> and
financial sectors may not have the desired results with creditable fiscal adjustment
(Reddy, 1999) (24) .
Despite the unfavorable fiscal environment, the Reserve Bank has been able,
through a combination <strong>of</strong> measures, to bring down interest rates to realistic and
relatively stable levels (EPW Research Foundation, 2000) (25) . For achieving, such a
downward trend in interest rates, the RBI has adopted multiple strategies, the broad
thrust <strong>of</strong> which is based on a refreshing change in perspectives on <strong>monetary</strong> <strong>policy</strong>.
Therefore, stability or the minimization <strong>of</strong> volatility in the money market is pursued as
15