Can Monetary Policy Alone Save The Indian Economy?

1494 words - 6 pages

Monetary policy alone cannot save Indian economy
Main Limitations of the Monetary Policy adopted by the Reserve Bank of India
1. Huge Budgetary Deficits :
RBI makes every possible attempt to control inflation and to balance money supply in the market. However Central Government's huge budgetary deficits have made monetary policy ineffective. Huge budgetary deficits have resulted in excessive monetary growth.
2. Coverage Of Only Commercial Banks :
Instruments of monetary policy cover only commercial banks so inflationary pressures caused by banking finance can be controlled by RBI, but in India, inflation also results from deficit financing and scarcity of goods on which RBI may ...view middle of the document...

The widening of foreign exchange market and development of rupee - foreign exchange swap would reduce risks and volatility.
8. Lack Of Transparency :
The monetary policy formulation, in its present form in India, cannot be continued indefinitely. For a more effective policy, it would be necessary to have greater transparency in the policy formulation and transmission process and the RBI would need to be clearly demarcated.
9. Predominance of cash transaction:
In India still there is huge dominance of the cash in total money supply. It is one of the main obstacles in the effective implementation of the Monetary Policy. Because Monetary policy operates on the bank credit rather on cash.
10. Pursuit of an anti-inflationary high interest rate policy in India would lead to destabilising capital inflows and appreciation pressures on the Rupee.
The RBI faces the classic trilemma, One cannot have fixed exchange rates, free capital flows and monetary policy autonomy at the same time. The RBI can counter the inflows by allowing the Rupee to appreciate continuously. But continuing appreciation of the Rupee would hurt competitiveness and may not still solve the inflow problem given the unpredictability of foreign investor sentiment.
Effective Date |
| Bank Rate | Repo | Reverse | Cash Reserve Ratio | Gross Domestic Product at Factor Cost(current price) | % change of gdp of current prices | Gross Domestic Product at Factor Cost(constant price) | % change of gdp constant price | WPI |
3-05-2013 | 8.25 | 7.25 | 6.25 | - |   |   |   |   | 4.7 |
19-03-2013 | 8.50 | 7.50 | 6.50 | - | 25482.20 | 0.00 | 14707.82 | 0 | 5.65 |
9-02-2013 | - | - | - | 4.00 | 25482.20 | 0.00 | 14707.82 | 0 | 7.28 |
29-01-2013 | 8.75 | 7.75 | 6.75 | - | 25482.20 | 2.96 | 14707.82 | 3.80 | 7.31 |
3-11-2012 | - | - | - | 4.25 | 24727.85 | 9.89 | 14148.69 | 7.72 | 7.24 |
22-09-2012 | - | - | - | 4.50 | 22282.89 | 0.00 | 13055.31 | 0 | 8.07 |
11-08-2012 | - | - | - | - | 22282.89 | 0.74 | 13055.31 | -0.668 | 8.01 |
17-04-2012 | 9.00 | 8.00 | 7.00 | - | 22117.19 | -2.37 | 13142.55 | -6.80 | 7.5 |
10-03-2012 | - | - | - | 4.75 | 22642.27 | 0.00 | 14037.27 | 0 | 7.69 |
14-02-2012 | 9.50 | - | - | - | 22642.27 | 0.00 | 14037.27 | 0 | 7.56 |
28-01-2012 | - | - | - | 5.50 | 22642.27 | 3.23 | 14037.27 | 3.73 | 7.23 |
25-10-2011 | - | 8.50 | 7.50 | - | 21911.32 | 0.00 | 13512.52 | 0 | 9.87 |

  |   |   |   | Inflation % |
Date | CRR | Repo rate | Reverse repo rate | Before (previous month) | After(end of current month |
5-Jan-2009 | 5 | 5.5 | 4 | 9.7 | 10.45 |
5-Mar-2009 | 5 | 5 | 3.5 | 9.63 | 8.03 |
21-Apr-2009 | 5 | 4.75 | 3.25 | 8.7 | 8.63 |
19-Mar-2010 | 5.75 | 5 | 3.5 | 14.86 | 13.33 |
20-Apr-2010 | 6 | 5.25 | 3.75 | 13.33 | 13.91 |
2-Jul-2010 | 6 | 5.5 | 4 | 13.73 | 11.25 |
27-Jul-2010 | 6 | 5.75 | 4.5 | 11.25 | 9.88 |
16-Sept-2010 | 6 | 6 | 5 | 9.82 | 9.7 |
2-Nov-2010 | 6 | 6.25 | 5.25 | 9.7 | 8.33 |
25-Jan-2011 | 6 | 6.5...

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