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

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ACKNOWLEDGEMENT While writing this thesis, I have freely drawn up on the informative writings and teachings <strong>of</strong> large number <strong>of</strong> eminent economists and writers on the subject, past and present. Let me thank all <strong>of</strong> them at the very outset, with great gratitude and sincere heart. No few words can express my pr<strong>of</strong>ound gratitude and indebtedness to my supervising guide, Dr. K.C. Sankaranarayanan, former Pr<strong>of</strong>essor and Head <strong>of</strong> the Department, Department <strong>of</strong> Applied Economics and former Dean <strong>of</strong> Faculty <strong>of</strong> Social Sciences, Cochin University <strong>of</strong> Science and Technology, without whose expert and constant help, this work would not have been complete, in any respect. His timely suggestions, scholarly instructions and constant blessings that I received right from the beginning were <strong>of</strong> great help to me. I express my sincere gratitude to Dr. M. Meera Bai, Head <strong>of</strong> the Department <strong>of</strong> Applied Economics, Pr<strong>of</strong>essor and former Head <strong>of</strong> the Department Dr. D. Rajasenan, former Head <strong>of</strong> the Department and my Doctoral Committee member, Dr. P. Arunachalam, Pr<strong>of</strong>essor and former Head <strong>of</strong> the Department Dr. S. Harikumar and Dr. P.K. Manoj, Department <strong>of</strong> Applied Economics, who have helped and supported me in various ways in completing this work. I sincerely and earnestly thank the Principal and staff <strong>of</strong> S.N.M College, Maliankara and place on record my heartfelt gratitude to my dearest teachers Dr. M.B. Ajithan, Dr. K. Padmaja, Smt. P.K. Premavathy, Smt. V.P. Asadevi, and Sri. S.P. Sudheer <strong>of</strong> Department <strong>of</strong> Economics, for their immense care and sincere support during the course <strong>of</strong> this work. Dr. M.K. Saralamma, my teacher and Head <strong>of</strong> the Department <strong>of</strong> Economics, Kerala University Centre, Kariavattom and Dr. P.S. Mohankumar, Pr<strong>of</strong>essor, DCSMAT, Trivandrum, deserve my special thanks in this context. I owe much to the Librarians and staff <strong>of</strong> S.N.M College Library, Department <strong>of</strong> Applied Economics and Management Studies Library, CUSAT, Kerala University Library,
Palayam, Centre for Development Studies, Trivandrum, and Department <strong>of</strong> Economics Library, Kariavattom, for their sincere co-operation and warm welcome. I am also grateful to the <strong>of</strong>fice staff <strong>of</strong> the Department <strong>of</strong> Applied Economics and Administrative <strong>of</strong>fice, for their sincere co- operation and support. Without the co-operation, sincere and patient support and kindness <strong>of</strong> my friend and data analyst Dr. C. Sunanda, this study would not have been in the present form. I thank Sunanda for the timely help. I also place on record my sincere thanks to all my friends and well-wishers, especially to Swami Vinaya Chaitanya, Shoukath, Shyam Balakrishnan, Mrs. Vincy John George, Mrs. Mini Sanjay, Swami Tyageeswaran, Murali, Raveendran and Mrs. Rejisha Biju who directly and indirectly helped me in this regard. I wish to express my deep and true feelings towards my parents Artist T. K. Hariharan and Pr<strong>of</strong>essor C.P. Lalitha, for their warm care, constant love and blessings. My husband Mr. V. S. Gireesh; who is working abroad, and my beloved daughter Nanma also deserve the share. My sister, Dr. Jitha Shajith and all my family members and relatives bestowed moral support to me. I am especially grateful to my uncle late Dr. T.K. Suseelan, who sincerely encouraged me, always with his pleasant positive attitude and kind heart. I wish to dedicate this work to him. Above all, I remember the wonderful blessings <strong>of</strong> my Guru and Almighty without whose kind support, I do not think I would have been successful in all my work. Smitha T.H.
Page 1 and 2: IMPACT OF MONETARY POLICY ON INDIAN
Page 3: DECLARATION I declare that the thes
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
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
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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<
Page 75 and 76:
established demand-and supply analy
Page 77 and 78:
The value of money
Page 79 and 80:
level will be strictly proportional
Page 81 and 82:
deposits (D) of a
Page 83 and 84:
The money supply (M) consists <stro
Page 85 and 86:
employment, rate of</strong
Page 87 and 88:
A. Total Wealth The total wealth is
Page 89 and 90:
Income Friedman‘s quantity theory
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―An irregular simple empirical re
Page 93 and 94:
Finally, even if there is the ‗li
Page 95 and 96:
this model as world occur in a syst
Page 97 and 98:
initial endowments of</stro
Page 99 and 100:
economists believe that like transa
Page 101 and 102:
Thus, the total demand for money ca
Page 103 and 104:
Income; where with the increase in
Page 105 and 106:
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
Page 111 and 112:
But, defined in a narrow sense, <st
Page 113 and 114:
(2) Economic growth (3) Full employ
Page 115 and 116:
monetary p
Page 117 and 118:
Full Employment and Economic Growth
Page 119 and 120:
price stability along with distribu
Page 121 and 122:
This new set of fa
Page 123 and 124:
Market yield on Equity Tobin sugges
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interest rate will rise again and s
Page 127 and 128:
thriftiness, could not, it was argu
Page 129 and 130:
Keynes emphasized that the liabilit
Page 131 and 132:
close and regular relationship betw
Page 133 and 134:
8. Friedman, M. 1970. The Counter R
Page 135 and 136:
40. Friedman, Milton. 1956. The qua
Page 137 and 138:
CHAPTER-III SIGNIFICANCE OF MONETAR
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3.1. ROLE OF MONETARY POLICY IN DEV
Page 141 and 142:
most of investment
Page 143 and 144:
many financial assets each differin
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composite or integrated system. Thi
Page 147 and 148:
Despite the general support and ind
Page 149 and 150:
is not just second best; it may eve
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3.3. SOME MONETARY CONSTRAINTS Ther
Page 153 and 154:
countries. There is little reason t
Page 155 and 156:
to monetary <stron
Page 157 and 158:
ultimate goal variables on the othe
Page 159 and 160:
CHAPTER- IV REVIEW OF MONETARY POLI
Page 161 and 162:
currency reserves to $6.4 billion a
Page 163 and 164:
public action. The balance
Page 165 and 166:
4.4. MONETARY POLICY 1994-95 The ye
Page 167 and 168:
of growth
Page 169 and 170:
control money growth. The cash rese
Page 171 and 172:
With regard to industrial productio
Page 173 and 174:
atio of 1.7 per ce
Page 175 and 176:
was restored with the sentiment imp
Page 177 and 178:
eserves by over US $ 2.4 billion du
Page 179 and 180:
government administrative departmen
Page 181 and 182:
1999-2000 and an increase o
Page 183 and 184:
has been significant deceleration i
Page 185 and 186:
and SDR) reached a record level <st
Page 187 and 188:
contribution of in
Page 189 and 190:
cent in June, 2003. Lending rates h
Page 191 and 192:
money as of that d
Page 193 and 194:
from late 2003, posed considerable
Page 195 and 196:
under pressure to reach 7.71 per ce
Page 197 and 198:
Inflation, with its roots in supply
Page 199 and 200:
The increasing trend in gross domes
Page 201 and 202:
The average growth of</stro
Page 203 and 204:
and 9.7 per cent in 2007-08 and 200
Page 205 and 206:
facilitating monetary</stro
Page 207 and 208:
world, for the better part
Page 209 and 210:
went up from around 8 per cent to 1
Page 211 and 212:
This is only a brief report <strong
Page 213 and 214:
CHAPTER - V MONEY MARKET INSTRUMENT
Page 215 and 216:
During 1961-85, the interest rates
Page 217 and 218:
Table: V.1 Lending Rate during the
Page 219 and 220:
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
Page 227 and 228:
domestic term deposit with a maturi
Page 229 and 230:
(B) deposits. This would apply in r
Page 231 and 232:
paying the depositors at the contra
Page 233 and 234:
ii) Entities other than authorized
Page 235 and 236:
iii) The interest rate ceiling on F
Page 237 and 238:
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
Page 245 and 246:
1998-99 i) To develop an efficient
Page 247 and 248:
Bank, an increased access over the
Page 249 and 250:
ii) With effect from the fortnight
Page 251 and 252:
5.5. CERTIFICATE OF DEPOSITS (CDS)
Page 253 and 254:
ii) With a view to provide flexibil
Page 255 and 256:
tend to raise amidst ample liquidit
Page 257 and 258:
iii) In November 1996, the extent <
Page 259 and 260:
as reflected in the close co-moveme
Page 261 and 262:
iii) Effective from November 2, 199
Page 263 and 264:
over the monthly average level <str
Page 265 and 266:
1996-97 PSCFC scheme was terminated
Page 267 and 268:
1999-2000 i) The general refinance
Page 269 and 270:
1992-93 Some of th
Page 271 and 272:
ii) As a measure to boost exports,
Page 273 and 274:
2003-2004 i) The interest rate ceil
Page 275 and 276:
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
Page 321 and 322:
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
Page 335 and 336:
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
Page 373 and 374:
Table: VI.11 Total Bank Credit to C
Page 375 and 376:
Table: VI.12 Net Foreign Exchange A
Page 377 and 378:
liabilities to the public had only
Page 379 and 380:
Reserve money and Narrow Money exhi
Page 381 and 382:
supply in India, in almost all the
Page 383 and 384:
Output can be measured both in nomi
Page 385 and 386:
een facing a loss of</stron
Page 387 and 388:
decade of reform,
Page 389 and 390:
India has still a balance between o
Page 391 and 392:
Let us suppose that velocity is con
Page 393 and 394:
Table VI.21 provides the annual rat
Page 395 and 396:
India‘s inflation can also be mea
Page 397 and 398:
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
Page 403 and 404:
Table: VI.27 Credit- Deposit Ratio
Page 405 and 406:
with other advanced and emerging ma
Page 407 and 408:
during 1996, 1998 and 2000-02 were
Page 409 and 410:
Table: VI.31 Net Domestic Capital F
Page 411 and 412:
was at the highest in 1991-92, with
Page 413 and 414:
December 2002, employment growth in
Page 415 and 416:
arising from the slowdown in growth
Page 417 and 418:
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
Page 423 and 424:
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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