monetory policy- simplifying the mystique

8/3/2019 Monetory Policy- Simplifying the Mystique

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Monetary Policy

of the Central Bank:

Simplifying the

Mystique

Introduction

Monetary policy is an important

constituent of overall economic policy

towards the pursuit of various economic

goals, including expansion of

employment, higher economic growth,and maintenance of price stability. Over

the past century, the prominence of

monetary policy has been on a steady

rise, and presently, hardly a day goes by

without some mention of monetary

policy appearing in the headlines.

Economists and market analysts are

making considerable efforts towards

continuous speculation about the likely

future actions of the monetary

authorities across the matured and

the emerging economies. With

development of a broad based financialmarket in India and greater integration

with the rest of the world, monetary

policy has assumed increasing

significance in recent years.

Banking sector plays a critical role in

transmitting monetary policy action to

spending decisions of consumers and

investors, and ultimately affecting

output and prices. Monetary policy,

which involves regulation of money

stock or short term interest rate, affects

various kinds of economic and financial

decision making, such as purchase of a

house, car or consumer durables;

starting up or expanding a business;

investment in a new plant or equipment

through its influence on cost and

quantum of credit. Through its impact

on the spending decisions of the public

on goods and services, monetary policy

imparts its influence on aggregate

demand, and thus, on output and

prices. Given the importance of banks

in transmission of monetary action to

spending decisions, and ultimately

achieving the final objectives of

economic growth and price stability, the

present paper attempts to present the

working of monetary policy to bankers

and general public.

Amaresh Samantaraya*

Recently, Dr. Y.V. Reddy, Governor, Reserve Bank of India (RBI) has highlighted

greater challenges for monetary policy communication in a market oriented

environment in India at present in view of the stakeholders becoming larger and

wider and the monetary policy by itself assuming increasing complexity in terms of

operating framework and instruments (Reddy, 2008). There is an increasing

recognition of the importance of market expectations and public perceptions

enhancing monetary policy effectiveness. In this perspective, the present paper

attempts to promote better public understanding and seeks to answer what is it

that the monetary authorities do, and how they do it?

*Assistant Adviser, Monetary Policy Department, Reserve Bank of India, Mumbai. The views expressed in the paper are strictly personal.

Errors and omissions, if any, are the sole responsibility of the author. The usual disclaimers apply.

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The rest of the paper presents the

monetary policy framework in general,

broadly outlines the salient features of

conduct of monetary policy in India, and

guides how to read/interpret the

monetary policy statements as

announced by the RBI Governor.Glossary of terms related to conduct of

monetary policy in India is presented in

the Appendix.

The role of monetary policy, across the

countries, has seen a fundamental

transformation over time. In the recent

decades, there is a definite trend

towards making monetary policy more

and more sensitive to the objectives of

attaining and maintaining output and

price stability. In view of greater

integration of financial market both at

home and across the geographical

boundaries, the objective of ensuring

financial stability is also gaining

increasing importance.

Monetary policy involves regulation of

money stock or the short term interest

rate to attain monetary policy objectives

such as stabilization of output and

prices. The responsibility for the

conduct of monetary policy generally

rests with the central bank of thecountry, as it enjoys considerable

control on regulation of money stock

through its monopoly over issue of

currency, and creation/ destruction of

bank reserves. In Indian context, the

Reserve Bank of India is the monetary

authority in addition to its other

responsibilities including regulation

and supervision of the banks,

government debt management, banker

to government, foreign exchange

management.

As 'money' plays an important role in

monetary policy, we shall start with

discussing what 'money' is. When we

say some have a lot of money, we

basically mean that they are so rich that

they can buy almost anything they want.

In this sense, 'money' refers to 'wealth'.

However, economists and central

Broad Monetary Policy Framework

bankers use the word 'money' in a more specific sense. For them, 'money' is the

set of assets in the economy that is used regularly by the people to purchase

goods and services from other people conveniently. The cash in our wallet is

money because we can use it to buy a meal at a restaurant or a shirt from a store.

Similarly, bank deposits against which cheques are drawn are as good as cash

and can be treated as 'money'. However, other forms of assets such as a building

or a car are not considered as money, because we cannot buy a meal or shirt withthis form of assets without selling those for cash.

Technically, two forms of money stock viz. (i) narrow money, and (ii) broad money

are widely used in the discussion of monetary policy. The measure of narrow

money includes currency in circulation plus demand deposits (current account

and other chequeable deposits) in the economy. Broad money includes time

deposits (fixed deposits) in addition to constituents of narrow money. In India,

narrow money and broad money are denoted as M1 and M3, respectively. RBI

(1998) provides detailed discussion on the conceptual and methodological

issues related to monetary aggregates in India.

In this backdrop, let us now discuss the broad outline of monetary policy

framework and sequence of steps involved in the conduct of monetary policy

(Exhibit 1).

Instruments

Operating Targets

Intermediate Targets

Objectives

Exhibit 1: Framework of Monetary Policy

Reserve Requirements

Standing Facilities & Central

Bank Refinance Rates

Open Market Opera ti ons

(including Repo)

Moral Suasion

Bank Reserves

Short-term Money Market Rates

Monetary/Credit Targets

Long-term Interest Rates

Foreign Exchange Rate

Price Stability

Output/Employment

Financial Stability

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In the conduct of monetary policy, the ball rolling starts with

preparing the set of objectives desirable to be achieved

through monetary policy actions. In general, the list of

monetary policy objectives includes price stability,

output/employment augmentation, and financial stability

including ensuring comfortable balance of payments

conditions. Country specific conditions as also evolvingmacroeconomic environment in an economy determine

emphasis on either of these objectives. In the theoretical

plane, there has been a debate on assigning single or

multiple objectives to monetary policy (Rangarajan, 2002).

Another related issue pertains to conflict among few

objectives. Arguments in favour of single objective are in

terms of clarity of the goal, ensuring commitment of the

central bank to achieve this goal and enabling the public to

evaluate the success of the central bank in terms of a single

yardstick. Timbergen's 'assignment rule' implies that the

instrument of monetary policy should pursue a single

objective of price stability which is most suitable for it. On theother hand, pursuing single objective is critricised on the

grounds that it encourages conservatism on the part of the

central bank and gives rise to policy bias towards low

inflation, which might be sub-optimal from the point of view

of economic growth and social welfare.

By now, a consensus has emerged in the case of industrially

advanced countries that monetary policy is best suited to

pursing the goal of price stability. Many countries, beginning

with New Zealand and followed by a sizeable number of

countries both advanced and emerging, have also gone for

direct targeting of inflation, so that a single objective of

monetary policy get entrenched into their economic systemas a public commitment of the central bank. Central banks in

these countries have been given necessary autonomy to

wield sufficient independence and flexibility over the

management of interest rates and money supply towards

fulfilling the 'inflation target'. However, due to several

considerations, inter alia, low level of market integration,

high susceptibility of the economy to domestic and external

shocks, lack of conclusive evidence supporting the claim of

long run growth neutrality of monetary policy and the very

measurement of potential output, many developing and

emerging economies prefer pursuing multiple objectives.

To emphasize, the first step in the formulation of monetary

policy involves clearly defining its objectives, and

necessary balancing in case of multiple objectives.

Depending on the macroeconomic environment and global

developments, the objectives are quantified in terms of

inflation rate or output/employment growth (say 2 or

5 per cent).

However, it is most important to note that the final objectives

of monetary policy as discussed above are not under its

direct control in most cases. Hence, the monetary authority

has to rely on appropriate 'intermediate targets'. The choice

of 'intermediate target' is largely based on its close and

predictable link with the final objectives as well as ability of

the monetary authority to exercise reasonable control over it.Generally, money stock measures, foreign exchange rate

and interest have been used as intermediate targets by

various central banks depending on the country specific

situation. Depending on the objectives to be achieved as set

in quantitative terms, consistent level/rate of intermediate

target is arrived at. For example, appropriate growth rate of

money stock consistent with achieving particular inflation

rate and output growth rate is derived from the money

demand equation. RBI (1985) provides the technical details

of the related exercise.

After estimating the desired level/rate of intermediate

targets, the operating procedure of monetary policy

tactically decides the appropriate 'operating target' and the

set of policy instruments, the mode and frequency of their

use and related issues in order to influence the 'intermediate

target', accordingly. As a first step, the desired level (rate) of

the 'operating target' is arrived at based on the estimates of

the desired level of 'intermediate target'. World over,

monetary base particularly, bank reserves and short term

money market rates are used as the 'operating targets'. The

relationship between money stock and bank reserves are

derived from the 'money multiplier' equation (for details

please see RBI, 1985). Similarly, as medium term interest

rates consist of a series of short term interest rates over time,current short term interest rate (operating target) combined

with information on expected future short term interest rates

influence the shape of medium term interest rates

(intermediate target). Variation of interest rates also

influences foreign exchange rate (another intermediate

target) through its impact on cross-border capital flows.

Subsequently, the task at hand boils down to employing the

appropriate set of policy instruments in order to achieve the

desired level for the operating target.

Traditionally, instruments in the form of standing refinance

facilities and statutory reserve requirements have been very

useful in liquidity management. In recent times, an array of

indirect instruments such as open market operations (OMO)

including repo transactions in domestic securities, foreign

exchange swaps find wide application. These monetary

policy instruments alter the liquidity conditions in the system

and accordingly influence operating targets such as bank

reserves or short term interest rates in the desired manner.

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For example, open market purchase of government

securities injects liquidity in the banking system, and thus,

augments banks' deposits with the central banks (bank

reserves) and reduces short term interest rates. Estimation

of appropriate amount of liquidity injection to influence the

operating targets precisely is a very challenging task for the

monetary authority.

Thus, as depicted in Exhibit 1, policy induced changes in the

instruments result in desired changes in appropriate

operating and intermediate targets, which ultimately leaves

its impact in achieving the final objectives. Various

dimensions of monetary policy operations vary across the

countries depending upon the structure of the economy,

institutional arrangements and level of development of the

financial sector. Within a country also, these parameters

have experienced steady transformation and modification

over time with changing economic environment.

There is also considerable variation in the decision makingprocess across the central banks. In countries such as

Australia, Canada, India, Israel and New Zealand, the

Governor of the central bank solely take monetary policy

decisions in terms of variation of policy instrument. The

Governor, of course, receives suggestions and advices

formally or informally for facilitating informed judgment. On

the other hand, in Brazil, the Euro Area, Korea, Sweden, the

United Kingdom and the United States, a 'monetary policy

committee' takes collective decision on monetary policy.

Patra and Samantaraya (2007) provide a comprehensive

account of monetary policy decision making in select central

banks covering both matured and emerging economies.Day-to-day liquidity management decisions, however, rests

with a committee/group at senior/middle management level

or at department level responsible for market operations.

Banks play a very important role in monetary policy

operations. Monetary policy instruments essentially

influence liquidity conditions in the system and resultant

variation in bank reserves defines the taking off for the

monetary policy flight. Interest rate in the inter-bank money

market is the focal point of central bank liquidity operations.

Now, variation in bank reserves and short term interest rate

set the tone for medium term interest rate, which in turn

affects spending decision for housing, consumer durables,expanding production facilities or working capital

requirements. Here also, banks' decision on lending rates

based on the signals from the monetary authority (in the form

of variation of bank reserves or policy rates) critically

influence spending decisions, and shapes strength of

monetary policy altitude of the flight. Of course, suitable

expectation formation by the market and public in general

based on central bank credibility reinforces policy

effectiveness. Moreover, imprudent behavior of the banking

sector which pose threat to financial stability, as evident in

the recent global financial turmoil triggered by the 'sub-

prime' crisis in the United States, may be inimical to soft-

landing in terms of ultimate effect of monetary policy on

output and prices.

The monetary transmission mechanism delineates the

process through which monetary policy shocks (actions)

administered through changes in policy instruments and

operating targets influence the final objectives. It describes

the nature and strength of the influence of monetary action

and the related lag structure of the effects. The lag structure

comes into picture, as monetary action affects final

objectives after certain time lags, generally after 6 to 24

months. The analysis of monetary transmission mechanism

is crucial for the conduct of effective monetary policy and its

importance cannot be overemphasized. In the standard

textbook approach, tight monetary policy characterized by

increase of short term interest rate raises medium term

interest rates and dampens aggregate demand through

curtailing investment and consumption spending. This puts

downward pressure on output and prices. The propagation

of monetary impulses through the interest rates as explained

above is known as monetary transmission through 'interest

rate channel'. In an open economy with free capital mobility,

the monetary shocks affect aggregate demand through the

channel of 'foreign exchange rate' also. Increase in interest

rate augments international capital inflow, which in turncauses appreciation of domestic currency. This makes

exports more costly and imports cheaper compressing

'exports over imports' and thus, reducing aggregate

demand. Similarly, with developed financial market, variation

in interest rate affects asset prices, which in turn affects

aggregate demand explained by wealth effect and Tobin's

'Q' (asset price channel). Furthermore, through the impact of

monetary policy on net worth of firms (balance sheet

channel) and on bank deposits and credit (bank lending

channel), the 'credit channel' comes into picture. Mishkin

(1996) provides schematic descriptions of working of the

individual channels of monetary transmission.

As discussed in the previous section, objectives, targets and

instruments of monetary policy evolve over time, keeping

pace with changes in the structure of the economy,

institutional arrangements and development of the financial

sector. This is true in case of India also. The preamble to

Monetary Transmission Mechanism

Conduct of Monetary Policy in India

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Reserve Bank of India Act, 1934 sets out the broad outline of

the objectives as, "to regulate the issue of Bank notes and

keeping of reserves with a view to securing monetary

stability in India and generally to operate the currency and

credit system of the country to its advantage". As enunciated

in various policy documents of the Reserve Bank, inflation

control and expansion of bank credit to support economicgrowth constituted as the dominant objectives of monetary

policy in India. Relative emphasis was placed on either of

them based on the prevailing economic conditions. With

development of a broad-based financial market with closer

global inter-linkages, 'financial stability' is included as

another important objective of monetary policy in India, in

the recent period.

From historical perspective, in the evolving process of

conduct of monetary policy in India, a sequence of phases

can be clearly discernable, although some overlapping

across the phases cannot be ruled out. Monetary policy in

the form of 'credit planning' regulating the quantum and

distribution of credit flow to various sectors of the economy in

consonance with national priorities and targets assumed

greater importance since adoption of philosophy of 'social

control' and nationalization of banks in late 1960s. However,

the policy regime was severely constrained by heavily

regulated regime consisting of high level of deficit financing,

priority sector lending, administered interest rates and

primitive financial sector. In the backdrop of the above

impediments, Chakravarty Committee (RBI, 1985)

comprehensively reviewed the functioning of the monetary

and banking systems and guided far-reaching

transformation in the conduct of monetary policy in India. Asrecommended by the Chakravarty Committee, 'monetary

targeting with feedback' was introduced as the basic

framework of monetary policy. As discussed in the previous

section, this framework suggested desirable growth of

money stock consistent with output and inflation objectives

of the RBI. Several reform initiatives and institutional

changes as part of the comprehensive reforms introduced

since early 1990s further strengthened the scope of

monetary policy operations. These initiatives included

development and deepening of key segments of the

financial market, phasing out automatic monetization of

government deficit through issue of ad hoc Treasury Bills,freedom to banks in determination of lending and deposits

rates except a couple of segments, adoption of prudential

norms in alignment with global best practices towards

enhancing financial stability.

By the late 1990s, ongoing financial openness and

sweeping changes in the financial sector reoriented the role

of interest rates vis--vis the quantity variables. It was felt that

in the evolving situation, while money aggregates (M3) still

acts as an important indicator, information pertaining to other

monetary and financial indicators should also be taken into

account while formulating monetary policy. Since April 1998,

the Reserve Bank formally adopted a 'multiple indicator'

approach in which information on interest rates, monetary

aggregates, credit, capital flows, inflation, exchange rate,etc., are pooled together for drawing policy perspectives.

Thus, in this new framework, information content of all these

indicators are monitored for assessing the overall

macroeconomic environment and evolving global

development. Based on this assessment and projection of

inflation and output growth for the ensuing year, appropriate

monetary policy stance is framed, including with regard to

flow of bank credit. In the recent years, a consideration for

financial stability in terms of quality of bank credit is also an

important input for the evolving policy stance. Consistent

with the stance, appropriate liquidity is maintained in the

system so that adequate/legitimate requirements of creditare met. During economic slowdown and subdued inflation,

the policy stance generally emphasizes adequate flow of

credit to augment consumer and investment spending. On

the contrary, in situations of high inflation and overheating

economy, the stance stresses on limiting credit flow only to

meet the legitimate requirements such as supporting

investment and export demands.

In alignment with the policy stance, the RBI undertakes

active demand management of liquidity through open

market operations (OMO) including market stabilization

scheme (MSS), liquidity adjustment facility (LAF) and

recourse to variation in cash reserve ratio (CRR). Particularly,as a response to unprecedented international capital inflows

in recent years, there has been greater reliance on MSS and

CRR to withdraw liquidity which are of the enduing nature.

LAF basically addresses temporary liquidity requirements.

More details of these instruments are presented in the

Appendix. Ultimately, these instruments attempt to

withdraw/inject liquidity in the banking system and thus,

shrinks/enhances the credit creating capacity of banks so

as influence investment and consumer spending as per the

policy stance.

The Governor of RBI announces the Annual Policy Statement

in the month of April every year for the corresponding

financial year followed by First Quarter, Mid-term and Third

Quarter Reviews, generally, in the month of July, October and

January, respectively. Our discussion in this section would

be limited to the Governor's Statement on monetary policy. It

consists of three sections. Section I reviews and assesses

How to Read RBI's Monetary Policy Statement

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the evolving macroeconomic and global developments in

terms of a stock-taking of output and inflation scenario

followed by a brief review of monetary and credit growth

along with the determining factors. Given the influence of

government borrowing on market interest rates and credit

behaviour of banks, likely outturn of the government

borrowing requirements are assessed. Behaviour of the keysegments of the financial market, namely money market,

government securities market, equity market and corporate

bonds market are also highlighted. Over the years, India's

linkages with the rest of the

w o r l d h a v e b e e n

increasing both in terms of

trade and financial flows. In

view of this, Section I

summarizes performance

of imports and exports,

behaviour of the current

and capital account, andthe movement of exchange

rates as also highlights

developments in the global

e c o n o m y c o u n t i n g

performance of world

output, prices, state of the

global financial system and

monetary policy stance of

major economies.

In the backdrop of the

macroeconomic assess-

ment and taking intoa c c o u n t e m e r g i n g

economic scenario, the

overall monetary policy

stance is presented in

Section II. Based on the

project ions of output

growth and inflationary

out look, appropr ia te

growth of money supply is

projected while taking on

board demand for bank

credi t f rom di f ferentsectors, likely growth of currency and deposits, and

borrowing requirement of the government. Conceptual and

theoretical issues relevant to formulation of monetary policy

stance are also touched upon. Appropriate nuances are

used to explain the policy stance so that the underlying

conditions are reflected. For example, Annual Policy

Statement 2005-06 puts the stance of monetary policy in

terms of "provision of appropriate liquidity to meet credit

growth and support investment and export demand in the

economy while placing equal emphasis on price stability." On

the other hand, stance in the Mid-term Review of Annual

Policy Statement 2005-06 was "consistent with emphasis on

price stability, provision of appropriate liquidity to meetgenuine credit needs and support export and investment

demand in the economy." The second statement clearly

assigns a higher weight for the objective of price stability and

focuses on meet ing

g e n u i n e c r e d i t

requirements signifying

relative withdrawal of

accommodations.

Finally, Section III of the

statement on monetary

p o l i c y e n u m e r a t e s

specific policy measures

in terms of variation in the

B ank R a t e , reve rse

repo/repo rates under LAF,

CRR, etc. reflecting the

actions undertaken in

a l i g n m e n t w i t h t h e

monetary policy stance.

T h e p r e s e n t p a p e r

attempted to explain, in

simple terms, the working

of monetary policy in India

with the objective of

making it understandable

for the bankers and

general public. Without

much technical vigor,

e m p h a s i s w a s o n

explaining conduct of

monetary policy in simple

l a n g u a g e . B e t t e r

understanding of the

importance and content of

policy announcements by the bankers and general public

would facilitate improvements in picking up the policy signal

appropriately and correct expectation formation. As noted

by Mohan (2005), the effectiveness of monetary policy will

crucially depend on how well the public and market

participants understand the central bank signals.

Conclusions

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Bank Rate

Bank Rate is the rate of interest at which the Reserve Bank is prepared to buy or rediscount bills of exchange or

other commercial papers eligible for purchase under the RBI Act, 1934. With raising or lowering of the BankRate, the cost of borrowing from RBI for the banks becomes dearer or cheaper. Thus, it serves as a signal to the

market and business community about tight or easy monetary policy. The Bank Rate was reactivated as the

central bank signaling rate since April 1997 by linking it to various rates of refinance. With emergence of

repo/reverse repo rates under LAF as the effective signaling rates, refinance facilities are gradually de-linked

from the Bank Rate.

Call Money Rate

'Call money rate' is the rate of interest at which commercial banks borrow from one another on an overnight

basis without recourse to any collateral. Inter-bank call money market enables banks to bridge their short-term

liquidity mismatches arising out of the day-to-day operations. At present, in addition to banks, primary dealers

(PDs) are also eligible to participate in the call money market in India. This is the first and foremost link in the

transmission of monetary policy action. Through its monopoly power over supply of bank reserves, the RBI isable to influence 'call money rate' which in turn acts as a signal for other market rates. With liquidity

management operations, the RBI endeavours to keep the 'call money rate' is generally moves within the

corridor formed by the reverse repo rate/repo rate under the LAF.

CRR

Cash reserve ratio (CRR) is a legal obligation on scheduled commercial banks to maintain certain reserves in

the form of cash with the RBI. CRR is required to be maintained as average daily balance on a fortnightly basis,

as a proportion to their respective net demand and time liabilities (NDTL). By variation of CRR, the RBI injects or

withdraws liquidity by releasing reserves to or sucking reserves from the banking system. In the post-reform

period, the medium term policy was to gradually reduce CRR to its statutory minimum. But, in response to

unprecedented surge in foreign capital inflows, CRR was reactivated since December 2006 as a monetary

policy instrument in the sterilisation process. Presently, CRR is set at 9.0 per cent.

GDP

Gross domestic product (GDP) is a commonly used indicator measuring aggregate economic activity in an

economy. It measures the value of all final goods and services produced within an economy during a given

period of time, in general, in a year. With some adjustment with regard to depreciation and net factor income

from abroad, it represents the national income.

LAF

Liquidity Adjustment Facility (LAF) of the RBI is a mechanism, instituted in June 2000, which enables banks to

mitigate their short-term mismatches in cash management on a daily basis with RBI. The LAF operates through

daily reverse repo and repo auctions on a fixed rate basis that sets a corridor for the inter-bank call money rate.

When the market is in a surplus liquidity mode, the RBI encourages banks to place liquidity with it through

reverse repo operations against the sale of government securities with an agreement to buy it back. On the

other hand, in tight liquidity conditions, RBI injects liquidity through repo operations by purchasing government

securities. At present, both reverse repo and repo are on overnight basis. LAF enables RBI to modulate short

term liquidity under varied financial market conditions in order to ensure stable interest rates in the overnight

money market. Presently, reverse repo rate and repo rate under LAF are placed at 6.0 per cent and 9.0 per cent,

respectively.

Appendix: Glossary of Terms

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MSS

In the wake of very large and continuous capital inflows and the need for modulating surplus liquidity

conditions of enduring nature, the market stabilisation scheme (MSS) was introduced in April 2004 to equip the

RBI with an additional instrument of liquidity management. Under the MSS, Treasury Bills and dated securities

of the Government of India are issued. Money raised under the MSS is held in a separate identifiable cash

account maintained and operated by the Reserve Bank and the amount held in this account is appropriated

only for the purpose of redemption and/or buyback of the Treasury Bills and/or dated securities issued under

the MSS. However, the cost of market stabilization bonds issued under MSS is borne by the Government of

India. MSS securities are also traded in the secondary market, at par with the other government stock

OMO

Open Market Operations (OMO) involves buying and selling of government securities by the RBI to regulate the

liquidity in the banking system. By purchasing (selling) government securities from (to) banks, the Reserve

Bank enhances (tightens) liquidity in the market. As compared to repo operations under LAF, outright OMO has

a relatively enduring impact on market liquidity.

SLR

Statutory liquidity ratio (SLR) is a legal obligation on banks to invest a certain proportion of their liabilities(NDTL) in specified financial assets including cash, gold and government securities. Variation of SLR alters

demand for bank reserves, and hence, has an impact on the growth money and credit in the economy. This also

facilitates smooth government borrowing, while promoting soundness in the banking system by ensuring

sizeable investment in safe assets. At present, SLR is placed at 25 per cent.

WPI

The wholesale price index (WPI) in India captures general price movements on weekly basis for all trade and

transactions. It is published with the shortest possible time lag of two weeks. It is widely used as a proxy to

measure the general price inflation in the economy. The current series of WPI with 1993-94 as base year was

introduced in April 2000.

References

1. Mankiw, N. Gregory (1998): Principles of Economics, Dryden Press.

2. Michael Debabrata Patra and Amaresh Samantaraya (2007): Monetary Policy Committee: What Works and Where,

RBI Occasional Papers, Vol.28, No.2, PP.1 26.

3. Mishkin, Frederic S. (1996): The Channels of Monetary Transmission Mechanism: Lessons for Monetary Policy,

NBER Working Paper No. 5464.

4. Mohan, Rakesh (2005): Communications in Central Banks: A Perspective, RBI Bulletin, October, PP. 911 919.

5. Rangarajan, C. (2002): Leading Issues in Monetary Policy, Bookwell, New Delhi.

6. Rangarajan, C. and B.H. Dholakia (1979): Principles of Macroeconomics, Tata McGraw-Hill Publishing Company

Limited, New Delhi.

7. RBI (1985): Report of the Committee to Review the Working of the Monetary System (Chairman: S. Chakravarty),

Reserve Bank of India, Mumbai.

8. RBI (1998): Report of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman:

Y.V. Reddy), Reserve Bank of India, Mumbai.

9. RBI: Annual Report, various issues.

10. Reddy, Y.V. (2008): The Virtues and Vices of Talking about Monetary Policy: Some Comments, RBI Bulletin, July, PP.

1117 1125.

11. Samantaraya, Amaresh (2003): Transmission Mechanism and Operating Procedure of Monetary Policy in India, Ph.D.

Thesis submitted to the University of Hyderabad.

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monetory policy- simplifying the mystique

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