Impact of RBI?s Monetary Policy for the Last Two Decades and Medium Te :: essays research papers

We are indebted to Prof.Bala V Balachandran, Prof.Lakshmi Kumar. The views expressed herein are those of the author and not necessarily those of the Great Lakes Institute of Management. 2004 by Kaushik.P All rights reserved. Short sections of text, not to exceedtwo paragraphs, may be quoted without explicit permission provided that full acknowledgement, including notice, is given to the source."Impact of RBIs Monetary Policy for the Last Two Decades and Medium Term Strategy for Managing Foreign Exchange Reserves."--Macro EconomicsKaushik.PSrinagar Colony, Off Raj Bhavan Road, 24, southeastern Mada Street,Chennai - 600015, IndiaPreamble     The Monetary Policy, traditionally announced twice a year, regulates the supply of money and the cost and availability of mention in the economy. It deals with both the lending and espousal rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic gro wth. The Reserve lingo of India is responsible for formulating and implementing Monetary Policy. It tin can increase or decrease the supply of currency as well as interest rate, carry out open commercialise operations, control credit and vary the reserve requirements. Objectives     The objective of price stability has, however, gained further importance following the opening-up of the economy and the deregulation of financial markets in India in recent times. on that point are four main channels which the RBI looks at      Quantum channel money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates).      Interest rate channel.      Exchange rate channel (linked to the currency).      Asset price. Monetary PolicyPre-Reform (Prior 1992)In the pre-reform era, the financial market in India was highly segmented and regulated. The money market lacked depth, with only the overnight interbank market in place. The interest rates in the government securities market and the credit market were tightly regulated. The dispensation of credit to the Government took place via a statutory liquidity ratio (SLR) process whereby the commercial banks were made to set aside square portions of their liabilities for investment in government securities at below market interest rates. Furthermore, credit to the commercial sector was regulated, with prescriptions of multiple lending rates and a preponderance of directed credit at highly subsidised interest rates. Monetary policy had to address itself to the task of neutralising the inflationary impact of the growing deficit. The Reserve Bank had to resort to direct instruments of monetary control, in particular the cash reserve ratio.