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

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

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<strong>in</strong> <strong>the</strong> <strong>in</strong>come velocity <str<strong>on</strong>g>of</str<strong>on</strong>g> base m<strong>on</strong>ey this has created an <strong>in</strong>centive for <strong>the</strong> government<br />

to resort more to market borrow<strong>in</strong>gs from banks which has raised real <strong>in</strong>terest rates and<br />

which exerts a depress<strong>in</strong>g <str<strong>on</strong>g>impact</str<strong>on</strong>g> <strong>on</strong> <strong>the</strong> growth <str<strong>on</strong>g>of</str<strong>on</strong>g> ec<strong>on</strong>omic activity al<strong>on</strong>g with<br />

creat<strong>in</strong>g pressures for <strong>the</strong> <strong>in</strong>flati<strong>on</strong> rate to <strong>in</strong>crease. The changed envir<strong>on</strong>ment calls for a<br />

reducti<strong>on</strong> <strong>in</strong> government expenditures which, while reduc<strong>in</strong>g <strong>in</strong>terest rates and<br />

enhanc<strong>in</strong>g <strong>the</strong> level <str<strong>on</strong>g>of</str<strong>on</strong>g> ec<strong>on</strong>omic activity, will also help nudge <strong>the</strong> ec<strong>on</strong>omy to a lower<br />

<strong>in</strong>flati<strong>on</strong> level (Errol D‘Souza, 2001) (35) .<br />

Kangasabapathy (2001) (36) captures <strong>the</strong> historical perspective <strong>in</strong> respect <str<strong>on</strong>g>of</str<strong>on</strong>g><br />

<str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> <str<strong>on</strong>g>policy</str<strong>on</strong>g> underp<strong>in</strong>n<strong>in</strong>gs with particular reference to India. He also po<strong>in</strong>ts out <strong>the</strong><br />

limitati<strong>on</strong>s and c<strong>on</strong>stra<strong>in</strong>ts <strong>in</strong> pursu<strong>in</strong>g <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> <str<strong>on</strong>g>policy</str<strong>on</strong>g> objectives and throws light <strong>on</strong><br />

current ma<strong>in</strong>stream ec<strong>on</strong>omic th<strong>in</strong>k<strong>in</strong>g and perspective <strong>in</strong> <strong>the</strong> c<strong>on</strong>text <str<strong>on</strong>g>of</str<strong>on</strong>g> <strong>the</strong> chang<strong>in</strong>g<br />

ec<strong>on</strong>omic envir<strong>on</strong>ment world wide. In <strong>the</strong> recent times, due to <strong>the</strong> emergence <str<strong>on</strong>g>of</str<strong>on</strong>g> <strong>in</strong>terest<br />

rate as an efficient variable <strong>in</strong> <strong>the</strong> transmissi<strong>on</strong> mechanism, <strong>the</strong> RBI has begun plac<strong>in</strong>g<br />

greater reliance <strong>on</strong> <strong>in</strong>direct <strong>in</strong>struments such as Repo, Bank rate, OMO etc., ra<strong>the</strong>r than<br />

<strong>the</strong> earlier practice <str<strong>on</strong>g>of</str<strong>on</strong>g> greater dependence <strong>on</strong> CRR al<strong>on</strong>e. Ano<strong>the</strong>r issue debated <strong>in</strong> <strong>the</strong><br />

c<strong>on</strong>text <str<strong>on</strong>g>of</str<strong>on</strong>g> Central Bank aut<strong>on</strong>omy is <strong>the</strong> separati<strong>on</strong> <str<strong>on</strong>g>of</str<strong>on</strong>g> debt management and <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g><br />

management functi<strong>on</strong>s. At <strong>the</strong> same time, it would require a co-ord<strong>in</strong>ated operati<strong>on</strong><br />

with <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> management to achieve a stable <strong>in</strong>terest rate envir<strong>on</strong>ment and market<br />

c<strong>on</strong>diti<strong>on</strong>.<br />

There are c<strong>on</strong>t<strong>in</strong>u<strong>in</strong>g debates <strong>on</strong> several issues c<strong>on</strong>nected with <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> <str<strong>on</strong>g>policy</str<strong>on</strong>g>.<br />

Questi<strong>on</strong>s have been raised <strong>on</strong> <strong>the</strong> objectives, <strong>in</strong>struments and <str<strong>on</strong>g>impact</str<strong>on</strong>g> <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g><br />

<str<strong>on</strong>g>policy</str<strong>on</strong>g>. M<strong>on</strong>etary management <strong>in</strong> <strong>the</strong> 1980s and more particularly <strong>in</strong> <strong>the</strong> 1990s <strong>in</strong> India<br />

<str<strong>on</strong>g>of</str<strong>on</strong>g>fers <strong>in</strong>terest<strong>in</strong>g <strong>in</strong>sights <strong>on</strong> <strong>the</strong> role <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> <str<strong>on</strong>g>policy</str<strong>on</strong>g> as an <strong>in</strong>strument <str<strong>on</strong>g>of</str<strong>on</strong>g> ec<strong>on</strong>omic<br />

<str<strong>on</strong>g>policy</str<strong>on</strong>g>. The paper written by Rangarajan (2001) (37) draws some important less<strong>on</strong>s from<br />

this experience. Assign<strong>in</strong>g to each <strong>in</strong>strument <strong>the</strong> most appropriate objective favours<br />

<str<strong>on</strong>g>m<strong>on</strong>etary</str<strong>on</strong>g> <str<strong>on</strong>g>policy</str<strong>on</strong>g> as <strong>the</strong> most appropriate <strong>in</strong>strument to achieve <strong>the</strong> objective <str<strong>on</strong>g>of</str<strong>on</strong>g> price<br />

stability. It is this l<strong>in</strong>e <str<strong>on</strong>g>of</str<strong>on</strong>g> reas<strong>on</strong><strong>in</strong>g which has led to <strong>the</strong> s<strong>in</strong>gle objective approach. A<br />

c<strong>on</strong>siderable part <str<strong>on</strong>g>of</str<strong>on</strong>g> <strong>the</strong> relevant research effort has been devoted to <strong>the</strong> trade-<str<strong>on</strong>g>of</str<strong>on</strong>g>f<br />

between ec<strong>on</strong>omic growth and price stability. Accord<strong>in</strong>g to <strong>the</strong> author, <strong>the</strong> efforts<br />

aimed at streng<strong>the</strong>n<strong>in</strong>g <strong>the</strong> <strong>in</strong>stituti<strong>on</strong>al structure are a necessary part <str<strong>on</strong>g>of</str<strong>on</strong>g> <strong>the</strong> functi<strong>on</strong>s <str<strong>on</strong>g>of</str<strong>on</strong>g><br />

a central bank.<br />

19

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