Reviewing Rbi Monetary Policy Framework

Topics: Inflation, Monetary policy, Keynesian economics Pages: 3 (802 words) Published: January 20, 2011
Reviewing RBI’s monetary policy framework
By Amol Agrawal
Of late, Mr.  Deepak Mohanty, RBI’s ED has been giving some excellent speeches. The speeches are basic and tell you a lot about economic issues in India. His recent speech looks at RBI’s monetary framework. He even reviews performance of Indian economy in each of the frameworks. See my previous blogpost on RBI’s monetary framework as well. He divides RBI’s monetary policy framework into three time periods: 1. Pre-monetary targeting (India independence to 1984-85): Till 1970s, inflation was mainly caused by agricultural failures. Therefore RBI’s main effort was towards selective bank credit management and ensuring flow of credit to increase agricultural production. In 1970s inflation increased because of increase in money supply which rose to finance rise in government expenditure. Inflation also rose because of the oil shocks in 1974 and 1979 which increased prices of oil in world markets. 2. Monetary targeting (MT, 1985-56-1997-98): By early 1980s, there was some consensus in RBI that inflation was rising because of a surge in money supply. Agriculture and oil shocks could not raise inflation permanently. It was a sustained rise in money supply that led to rise in inflation. This led to RBI’s monetary targeting framework in which RBI started targeting money supply. Under this RBI made a projection for money supply for a given year and tried to keep money supply around the projected levels.   3. Multiple Indicators approach (MI, 1998-99 onwards): After reforms in 1991, it became difficult to look at the relationship between money supply and inflation. Financial liberalization led to more innovative financial products. Earlier RBI could monitor money supply as banks were the only financial intermediaries. As non-banking sources of finance grew, monitoring money supply and thus inflation became difficult. Hence, RBI adopted the multiple indicators approach which looked at variety of economic...
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