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

ensuring this optimal split between monetization and borrowings in the present, it
would be possible to balance the future needs <strong>of</strong> the economy vis-a–vis the needs <strong>of</strong> the
government and thereby avoid the high interest/inflation trap and the subsequent
specter <strong>of</strong> an economic slowdown.
Drawing from recent experiences in India and abroad, Michael Debabrata Patra
and Sunando Roy (2000) (29) assess the Indian approach to reinforcing financial
stability. In the context <strong>of</strong> macroeconomic, macro and micro-prudential policies
undertaken in India, the paper empirically evaluates the responses <strong>of</strong> various
constituents <strong>of</strong> the banking system and finds differential responses.
Renu Kohli (2000) (30) analyzes the exchange rate behavior and its management
in India. A scrutiny <strong>of</strong> the exchange rate management strategy <strong>of</strong> the RBI reveals a
strong commitment to exchange rate stability and keeping the exchange rate aligned to
one <strong>of</strong> its fundamentals, i.e., the price level. It was found a positive response <strong>of</strong> direct
intervention activity, to a rise in exchange rate volatility. It was also found that
intervention activity adjustments appear to be tied to the price level. The implications
for intervention activity are even more significant in a situation where the capital
account is liberalized. A rise in the scale <strong>of</strong> future intervention would therefore imply a
significant build-up <strong>of</strong> reserves.
In the aftermath <strong>of</strong> the currency crises around the world, the role <strong>of</strong> the Central
Bank‘s interventions in the foreign exchange market has gained an importance. It is
obvious that such intervention affects the exchange rate in two ways; first, by affecting
the extent <strong>of</strong> excess demand in the foreign exchange market, and thereafter through a
complex interplay <strong>of</strong> the macro-economic variables. The literature has addressed this
issue by estimating the so-called <strong>of</strong>fset coefficients, a method that is ad hoc and that is
marked by the conspicuous absence <strong>of</strong> an underlying macro-model. In this paper,
Sumon Kumar Bhaumik and Hiranya Mukhopadhyay (2000) (31) build on the stylized
Mundell-Fleming model, and derive an estimable reduced form <strong>of</strong> expression that
allows us to link exchange rate movements with the RBI‘S interventions. The model
itself, the subsequent empirical results indicate that the effect on RBI‘s interventions in
17